Top Executives See Slow, Steady Growth in First Half of 2007

Chief executives at some of the nation’s top companies expect slow but steady growth in the first half of 2007, according to the Business Roundtable’s fourth quarter 2006 survey.

The CEO Economic Outlook Index, a survey of how chief executive officers believe the economy will perform in the months ahead, stands at 81.9, little changed from the third quarter’s rating of 82.4. The index centers on 50, meaning any number above 50 indicates economic expansion and anything below 50 suggests a contraction. The index is strongly higher than the 50-70 range it held as the economy emerged from recession in late 2002 and early 2003.

“This survey shows that CEOs are expecting a period of slower growth compared with the first half of 2006, with no major up or down movement in the economy during the first half of 2007,” said Harold McGraw III, chairman of Business Roundtable and chairman, president and chief executive officer of The McGraw-Hills Companies.

CEOs expect Gross Domestic Product to grow 2.8% in 2007, down two-tenths of one percent from the third-quarter survey and just below the historical average of 3.1% annual growth posted over the last 35 years.

“Our 2007 outlook assumes greater GDP growth than we saw in the second and third quarters of this year,” McGraw said. “But we believe it is tempered by uncertainties in consumer spending, a slightly higher interest rate environment, and the large U.S. current account deficit.”

The Federal Reserve has held the benchmark overnight lending rate at 5.25% for three months in a row. The Federal Open Market Committee is expected to leave the rate unchanged when it meets today, which would indicate that it believes inflation is moderating. Central bankers are betting that slower growth will curb inflation. The Fed has boosted rates 17 times since June 2004 in an effort to choke inflation.

The survey found that 69% of executives expect their company’s sales to increase in the first six months of 2007, 18% expect no change, and 14% look for a decrease. Thirty-nine percent of chief executives surveyed expect to increase capital spending, 48% foresee no change and 13% anticipate a decrease. On employment, 37% expect hiring to increase in the first six months of next year, 40% expect no change and 23% expect a decrease. (Totals may not equal 100 due to rounding.)

Fifty-one percent of surveyed CEOs placed rising healthcare costs at the top of their list of concerns. Increasing energy costs were cited by 16% of top executives.

“A key priority for 2007 will be to work with Congress and the administration to find solutions that help improve healthcare quality and affordability, including bringing technology and transparency to our healthcare system,” McGraw said.

He doesn't expect any major healthcare-related initiatives out of Washington before the 2008 presidential election, however.

McGraw urged Congress to expand the H-1B visa program, which allows companies to employ foreign professions to work in speciality occupations. He said the government should keep taxes low in order to spark investment, create new jobs and boost the economy.

The Business Roundtable’s CEO Economic Outlook Survey has been conducted quarterly since the fourth quarter of 2002. It’s intended to provide a forward-looking view of economic assumptions held at member companies. The current survey was conducted Nov. 13-30 by 124 of the Roundtable’s 160 member companies.

Business Roundtable members include American Express, Boeing, ExxonMobil, Goldman Sachs and General Electric, parent company of CNBC.