CEO's Gloomy About Economy

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If you really want to find out about America's economy, whom do you ask -- economists or CEOs? That question is open to debate, but if you believe in the CEO approach, new information suggests that you should be concerned about the current state of the economy. From the view of most economists, America's economy is in relatively good shape even though growth remains relatively low. From the view of business leaders, the short-term outlook for America is not quite as rosy.

The Business Roundtable CEO Economic Outlook Index is produced through surveys of CEOs. It analyses their plans over the next six months with respect to capital spending, sales, and employment expectations, along with questions to ascertain the reasoning behind the optimism or pessimism. For the 4th quarter of 2015, the index dropped from 74.1 to 67.5. It has slipped three straight quarters from a 2015 peak of 90.1 to reach a three-year low. The long-term average of the index is 80.1.

Why the pessimism in a generally growing economy? There are many reasons, from the CEO perspective. Here are some examples from the survey.

  • Regulations - Just about any business survey will find regulations on the top of the list of pessimistic factors. This year was no exception, as excessive regulation was listed as the top cost pressure being applied to businesses. From Dodd-Frank and environmental regulations to financial restrictions, businesses feel that they are under constant regulatory attack.
  • Tax Policy - Congress allowed bonus depreciation to expire without taking action, depriving businesses of tax breaks. CEOs argue that this must be incorporated as part of broader tax reform -- including lowering the nominal corporate tax rate of 35%, which is the highest of all developed countries.

In the eyes of CEOs, failing to address the corporate tax system is driving the trend of American companies reinvesting (or stashing, if you prefer) profits in overseas subsidiaries -- or, in some cases, becoming foreign-owned companies through mergers and tax inversions. Tax inversions establish corporations with headquarters in foreign countries, thus allowing them to pay taxes to the foreign government at a lower rate. The $160 billion Pfizer-Allergan merger is the most recent example.

  • Health Care/Labor Costs - Wage pressures have not increased across the board but are affecting certain businesses adversely. Lower-end retail and restaurants are feeling greater pressures. However, almost all businesses are facing increases in health care costs as the effects of Obamacare reach equilibrium.

  • Terror Events - The spread of soft-target terror attacks, such as those in Paris, could result in a more cautious approach for both consumers and businesses. The survey took place before the San Bernardino shootings, so it is possible that this factor was understated.
  • Strong Dollar - The downside of having one of the best economies worldwide is that our currency is very high, making exports more expensive. As a result, American companies depending on overseas income find it harder to keep sales income high and sustain growth.
  • Export-Import Bank - At least this one has since been resolved. Congress did not renew the authorization for the Export-Import Bank (EXIM) during the previous session. Reauthorization has been attached to the Transportation Bill that has passed the House and Senate, and the President is expected to sign the bill into law.

Granted, CEOs are looking through a narrow and self-interested focus in this survey, but they do raise valid points. Policymakers, economists, and legislators would be wise to pay attention and consider whether to adjust their plans accordingly.

This article was provided by our partners at moneytips.com

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