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CEO confidence in economy plunges, according to Q4 2018 Vistage survey

Economic confidence among CEOs continued to decline according to the Q4 2018 Vistage survey, reversing all of the gains recorded since the election of President Trump. The Vistage CEO Confidence Index was 95.4 in Q4, down from 103.0 in Q3 and last year’s fifteen-year peak of 110.3. The plunge was due to weakening evaluations of the national economy. Fewer CEOs reported that current economic conditions had improved (44%) compared to last quarter’s 64%. Even more notable is the drop in the increase of CEOs who expected the economy to weaken more than it will strengthen during the year ahead. In the face of weakening growth, more CEOs anticipate a slowdown in the pace of revenue gains and more plan to reduce their spending on new fixed investments. Notably, hiring intentions as well as profit expectations showed only small recent variations, although both were below levels recorded earlier this year. The largest disconnect is between the pessimistic outlook for the national economy and the modest declines in how CEOs view their own prospects. While a divergence between financial markets and the real economy is not uncommon over short period of time, there is little doubt that they will converge in the future. Overall, the data suggest that economic uncertainty has begun to negatively affect firms. Unfortunately, multiple sources of uncertainty now exist, including prospects for future monetary and fiscal policies as well as a potential global slowdown, making subsequent declines more likely than a quick snapback in optimism.

CEOs have pessimistic growth prospects.

Just 44% of all CEOs reported that conditions in the overall economy had recently improved, down from last quarter’s 64% and 66% in last year’s 4th quarter. When asked about prospects for the national economy in the year ahead, just 14% anticipated improvement, down from 25% last quarter and 45% a year ago. This plunging confidence in the national economy was due to a number of reasons, including rising interest rates, higher inflation and tariffs, a newly divided Congress, and a global slowdown. 33% of CEOs reported a pessimistic outlook for the economy in the coming year, which was the highest level since the start of the Great Recession. However, this negative economic outlook was still well below the 51% recorded in Q4 2007 or the 61% in the Q4 2018.

Revenue expectations and planned investment spending drop.

The proportion of firms who expected gains in revenues fell to its lowest level in two years, although gains were still expected by seven-in-ten firms. The slide during the past year has been large, with the proportion who expected gains falling to 70% from last quarter’s 75% and last year’s 83%. Planned investment spending also declined in the recent survey. Increased spending on fixed investments fell to 43%, down from 50% last quarter and 54% last year. Few firms, however, planned actual cutbacks — just 8%. So far, the small retrenchment in investment spending will only have a modest impact on economic growth.

Hiring and profit outlook remains stable.

Despite concerns about prospects for the economy, CEOs indicated expansive hiring plans in the year ahead. Increases in the total workforce are planned by 65% of all firms, and while these expansion plans are down from the fifteen year peak of 75% set in the prior quarter, it was still higher than any other survey since mid-2003. To attract and maintain their workforce, CEOs anticipate that higher wages and benefits will be required, and they are also focused on developing and training the workforce they have in place. Recent difficulties in workforce expansion may account for the reluctance of firms to slow the pace of hiring. Profit expectations remain strong despite softening of anticipated revenues, largely due to the fact that 54% of CEOs plan to increase the prices of the products or services in the year ahead. The positive hiring intentions of firms as well as increased wages will support consumer spending that will act to keep the overall economy expanding.