CEO Survey Points To More Of The Same In A Struggling Economy

Includes: BA, F, GE, IBM, JPM, PG, T, TTM, UPS, WMT, XOM
by: Brian Nichols

If you want a good idea of what's to come within the economy who better to ask than CEOs? Actually, it depends. CEOs can give good guidance on the future outlook of the economy, however a CEO's primary job functions are to increase profits and improve stock performance. Therefore, a good CEO is also an exceptional salesman, who can find something positive even when the only thing to report is something negative. These are the same people who dictate the direction of our economy, and the ever important unemployment issues in the U.S.

One of my favorite economic indicators is the CEO Economic Outlook Survey and earlier this week we saw the results from the survey, which interviews 164 CEOs, and reflects their plans to hire and spend, which ultimately affects the economy. This survey is an economic indicator that is largely "under-the-radar" as we don't place as much emphasis on its results, and some investors aren't even aware that it exists, however all investors should monitor the results closely.

Two of the largest problems in the economy are unemployment and large corporations posting all-time highs in net income and not spending that money to grow, due to economic fear and uncertainty. The survey that was released shows that these problems will most likely resume as the results indicate that fewer large corporations plan to hire or boost spending in the next six months.

According to the survey, only 36% of the CEOs plan to hire new employees in the next six months, which is down from 43% when the survey was conducted three months earlier. This informs us that CEOs are becoming more fearful in the economy, and are less certain that growth will continue, or that growth will slow. This also tells us that unemployment in the U.S. could potentially rise, or even stall, as we don't know if the remaining 64% of CEOs plan to maintain current employment levels or layoff employees.

We also learned that only 43% of those interviewed plan to increase spending on large goods such as machinery. Therefore, with fewer CEOs hiring this shows that cutting costs is the primary objective, most likely to ensure bottom-line expectations are met so stocks stay on par and do not retrace in a very unstable market. Obviously, when spending slows (or stops) along with hiring, it slows the growth of the economy and is one of the many reasons that our country has such a unemployment crisis. It's too bad CEOs don't realize the domino effect that they are creating.

This particular survey is one of the best in terms of economic outlook. It's the CEOs of large corporations who ultimately decide the direction of our economy, and this survey consists of the largest companies and the most influential CEOs in America. Take a look at the chart below, which shows a few of the companies that participate in this particular survey.

Company Ticker Revenue in Billions (NYSE:TTM) Employees
AT&T (NYSE:T) $127.3 252,330
Boeing (NYSE:BA) $73.21 171,700
Exxon (NYSE:XOM) $442.89 82,000
Ford (NYSE:F) $135.6 164,000
General Electric (NYSE:GE) $140.45 301,000
International Business Machines (NYSE:IBM) $106.98 433,362
JPMorgan (NYSE:JPM) $90.49 261,453
Procter & Gamble (NYSE:PG) $85.00 129,000
United Parcel Service (NYSE:UPS) $53.00 398,000
Walmart (NYSE:WMT) $455.00 2,200,000

As you can see from the chart above, those who vote on this list are made up of all sectors within the market, therefore creating a very accurate forecast of the market. The 10 companies above generated revenue in excess of $1.7 trillion over the last 12 months and currently employ nearly 4.4 million people (although not all in the U.S.) Therefore it is safe to say that the decisions of the CEOs who run these companies are vital to the health and growth of our economy.

For those of you unfamiliar with this survey, first I suggest you follow it, and then second here is a brief: The companies that participate in the interview create sales of $6 trillion combined and employ over 14 million people. This accounts for one-third of the total stock market value. Interestingly enough, these companies also pay $163 billion in dividends and give more than $9 billion in charitable contributions annually; and also create $420 billion per year for small- and medium-sized companies.

As we move forward throughout the remainder of this year, I believe we will continue to see slowed growth, and possibly a slight rise in unemployment. Earlier I mentioned the domino effect that large corporations create by choosing to spend less on large goods and employment. If large corporations don't hire this economy will not grow, our deficit will grow larger, and we will be stuck in the same flat market that we have experienced for the last 12 years.

My suggestion on how CEOs should aid in growing this economy is not the popular choice. First, I think CEOs should experience one bad year, or a year of falling margins, and hire employees to grow this economy. Because the solution to our problems are simple, if you hire employees, those people will buy goods, which then increases sales and grows the economy.

One large corporation should take the lead and rely on its already massive pile of cash to provide security to its company. Maybe CEOs should cut dividends in half for one year, which according to this survey, would be nearly $80 billion. Then at $60,000 per year that money could hire over 1.3 million people, which would be over 10% of the combined number of employees that the companies that are part of this survey employ. This would be a major provider of growth in this economy, and we would finally see America growing, rather than being stuck in a flat market.

Unfortunately, cutting dividends will never occur, because like I said, a CEO's job is to create higher profits and keep shareholders happy. Most likely we will continue to see more of the same over the next year, which is a flat market. According to this survey there is no reason to believe that executives will do their part. As I said at the beginning of this article, CEOs are the people who dictate the direction of the economy. It is not politicians, but rather this very small group of individuals, whose decisions can be felt through every aspect of our economy. And at this point, it appears as though the majority of these very important people believe it is best not to hire, and have failed to realize the domino effect that they have created, therefore keeping us in a flat market with limited growth for at least one more year.

Disclosure: I am long F.

Additional disclosure: This article is for informational purposes only and should not be used to make any investment decisions