Chief executives at many of the largest U.S. companies have grown increasingly pessimistic in recent months, citing economic uncertainty stemming from the looming “fiscal cliff” as a key reason for scaling back hiring plans and cutting spending for the short-term future.
Hold that economic recovery talk, there’s a cliff up ahead. According to a widely cited recent survey, American CEOs are more pessimistic about the American economy now than they have been over the past three years, which haven’t exactly been bullish for most markets.
Only 29 percent of the members of the Business Roundtable, an organization of CEOs heading companies like Xerox, Dow Chemical and General Electric, said they plan to increase hiring in the next six months, while 34 percent said they expect to decrease the number of employees. Things were looking brighter as recently as June, when 36 percent of the Roundtable’s members expected to increase hiring.
Only 30 percent today say they’ll increase spending on capital, down from 43 percent who planned to increase spending last quarter.
Much of the pessimism among business leaders stems from concerns regarding the “fiscal cliff.” Tax increases and federal spending cuts are set to take effect next year, and that will “throw cold water on long term planning,” according to W. James McNerney, CEO of Boeing and Business Roundtable board chairman.
The fiscal cliff will be reached on December 31, when a series of tax cuts introduced by former President George W. Bush are set to expire. Congress can extend the tax cuts, but hasn’t done so yet. If they don’t implement an extension, “the U.S. will go over the fiscal cliff, triggering $7 trillion worth of tax increases and spending cuts,” according to CNNMoney, which could take more than $500 billion out of the economy in 2013 alone.
The benefit of allowing the tax cuts to expire and spending to get slashed is that these measures would slow the growth of the deficit. But many economists say that would push the country back into another recession, wiping out the steps the country has taken to reverse the economic downturn, which economists consider to be the most serious recession since the Great Depression.
Republican presidential candidate Mitt Romney pounced on the downbeat news to drive home a point he’s been making, with a spokesman telling Reuters that “business leaders have the gloomiest outlook in three years and the President’s failed economic policies of higher taxes and more regulations will only make things worse.”
Much of the difficulty Congress is having in finding an acceptable bipartisan answer is the fact that this is an election year, which means lawmakers are preoccupied and not greatly concerned with issues that won’t get them re-elected or voted out of office – it’s the rare voter who will cast a ballot based on a representative’s position on the fiscal cliff.
The jittery mood among CEOs, especially of larger companies, is understandable. In times of economic uncertainty businesses tend to become more cautious by cutting hiring plans and scaling back capital outlays. They also try to generate more productivity from their existing workforce and the equipment they already have.
According to the survey, only 58 percent of executives at larger companies expect their sales to increase over the next six months, which is a significant drop from the 75 percent who had an optimistic outlook in June.
Although the housing market finally appears to be showing signs of life and consumer confidence has climbed to a seven-year high, the short-term outlook among CEOs remains mostly negative. Surprisingly, CEOs don’t see the upcoming election as a potential solution to the issue. In fact, they consider it an obstacle to effective policymaking.
According to Reuters, most business leaders think economic uncertainty about the fiscal cliff will continue no matter who wins the presidential and Congressional races. Only after the election will politicians be able to actually focus on resolving these issues instead of focusing on getting elected.
Chief financial officers are no more optimistic than CEOs. Reuters reports that other survey findings show “chief financial officers’ view of business prospects had also darkened in the quarter,” with CFOs lowering their expectations for hiring, capital spending and earnings growth.