Survey of CEOs showed optimism about economy
If the economy slides into a recession, among those most caught off guard might be the CEOs of some of the nation's largest corporations.
The Business Roundtable is an association of 160 CEOs running the nation's mega-companies, with nearly 10 million employees. Those CEOs are asked every three months about economic conditions, and when the survey was last released Dec. 4, just weeks before January's stock market plunge hit, they expressed an uptick in optimism that the economy would expand into 2008.
Frank MacInnis, CEO of Emcor, says his ability to read economic tea leaves has helped lead to 50 straight profitable quarters for his construction services firm. In an interview Wednesday before the Federal Reserve cut short-term interest rates another half percentage point, MacInnis said that the depth of the mortgage crisis has been a surprise, but Emcor has a record backlog of $4.5 billion in orders. The mistake that companies may be making is pulling back from more aggressive plans due to irrational fears, he says.
But on Wednesday, Starbucks said sales had dipped and CEO Howard Schultz told Reuters that consumers are likely already in a recession. Also, the Commerce Department said that the economy grew at a 0.6 percent annual rate in the fourth quarter, the weakest since pulling out of the 2002 recession. The price of Emcor stock reflects the opposite of unbridled optimism. It has fallen nearly in half since reaching a record high of $38.69 in July to close Wednesday at $20.54. The reason, MacInnis says, is that he has not effectively communicated Emcor's prospects, or that Wall Street has heard him but does not believe him.
MacInnis laughs and says he prefers the first explanation. It may be the latter. Franklin Allen, professor of finance and economics at The Wharton School of the University of Pennsylvania, says CEOs have not recognized that this recession would be different than recent U.S. recessions and resembles Japan of the 1990s - where property values fell in the face of economic malaise.
"Many business leaders are not used to thinking this way," Allen says. "The Fed ... has also been blindsided. They have consistently underestimated how serious the situation is."
CEOs are often pressed to justify their paychecks. A valuable quality would be a knack for recognizing when the Fed is wrong and allocating their companies' capital accordingly, says MacInnis. The most valuable CEO would be one who turned aggressive just before good times and pulled back ahead of bad times. Doing so means being ahead of the economic curve.
Hans Hickler, CEO of DHL Express USA, the U.S. arm of the German express delivery giant with 76,000 vehicles, says the weakening economy "didn't really sneak up." Evidence began to build after June 2007 as customers shifted to slower, less expensive, modes of shipping, he says.
Harold McGraw, chairman of the Business Roundtable, was unavailable for comment. The Roundtable has issued regular press releases supporting the economic growth package and other government attempts at firming up the economy. It praised proposals in President Bush's State of the Union address Monday, including permanent tax cuts and trade agreements with Colombia, Panama and South Korea.
Some CEOs say it's a fool's game to get into economic forecasting. "Economists have predicted seven of the last three recessions," says Jeff Ganek, CEO of communications company NeuStar, who has a bachelor's degree in economics and a master's in public policy and management. "The best CEOs aim to build in the flexibility needed to ride the economic curves up or down. Where the curves actually go is almost always a surprise."
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