Why You Shouldn't Trust Those Scary CEO Sentiment Indicators

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Two thermometers into the brains of corporate America plunged to depth not seen since the trough of the Great Recession when the US was losing hundreds of thousands of jobs a month.One was based on responses from CEOs of America’s largest corporations; the other was based on responses from analysts who’d listened to their industry contacts.

But given the mixed, rather than catastrophic, economic data, could these people have ulterior motives? 

In late September, it was the Business Roundtable (BRT)—an association of CEOs from the largest US corporations. Its Economic Outlook Index, after a bumpy slide from 113 in Q1 2011 to 89 in Q2 2012, lost its grip and plunged to 66. The worst level since Q3 2009, when the economy was mired in the Great Recession. And the third largest drop in the survey’s history.

Its largest drop? From Q3 to Q4 2008, when it collapsed from 78.8 to 16.5. In this diffusion index, above 50 means growth. So, within a quarter, these CEOs transitioned from decent growth to utter fiasco. Nestled in their own world, they’d been caught flat-footed by the financial crisis.

Incredibly, the index had actually edged up in the prior quarter though the housing bubble was blowning up, financial institutions were cratering, and Bear Stearns was gone. These CEOs should have seen that something big was on the way. But blinded by optimism and intoxicated by confidence in the system that had served them so well, they didn’t. Which left them with exactly zero predictive capabilities.

Now, suddenly, these CEOs have become morose. 58% expected sales to increase over the next six months, down from 75% in the prior quarter. By comparison, on the eve of Lehman and AIG, 78.8% of these prescient CEOs had expected sales to grow—and watched with astonishment the nosedive weeks later.

Only 30% of the CEOs said they would increase capital expenditures, the lowest score since Q3 2009. And only 29% expected to create jobs, while 34% expected to cut jobs. For a direr picture, you have to go back to Q4 2009—when the unemployment rate perforated 10%!

While BRT Chairman and Boeing CEO Jim McNerney also blamed “global demand” that was “flattening out,” he emphatically pointed at the “fiscal cliff” of tax increases and spending cuts.

Now Morgan Stanley’s proprietary Business Conditions Index also evoked the dark days of the Great Recession. The diffusion index is calculated from responses by industry analysts—normally not a pessimistic crowd—whose opinions are based on their contacts. And that index dropped like a rock from 55% in September to 41% in October, its “hiring index” from 54% to 44%—the worst level since December 2009—and its “hiring plans index” from 57% to 44%, the worst since August 2009, before unemployment had even peaked.

Who got blamed? The now usual suspect, the “fiscal cliff.” But Morgan Stanley economist Dane Vrabac added a new wrinkle, “election uncertainty”—as if election outcomes were certain in normal times, but this year somehow they were not.

Much like the CEOs of the BRT, these analysts didn’t see the financial crisis coming. And when jobs evaporated to the tune of 400,000 to 800,000 a month, the hiring index at best tracked those job losses, and often lagged them. And the “hiring plans index” lagged those job losses by six months. It’s as if these analysts had been reading old papers to figure out what would happen next.

Yet the CEOs of the BRT and the analysts and their industry contacts of the Morgan Stanley index have enormous resources at their fingertips, and an army of experts just an email or a phone call away. They’re smart people, they’ve been around the block a few times, and they have insights through their connections that outsiders can only dream about. Still, they were wrong about the financial crisis. But now they’re predicting an economy that’s going to be nearly as tough—and mostly because of the impending “fiscal cliff.” Are they wrong again? This time in the opposite direction? Or are they finally correct in their predictions, and economic fiasco is on the way?

Or perhaps they have another agenda altogether. Namely a form of extortion directed at Congress: give us our goodies, or else an economic nightmare will befall the nation, and you’ll get kicked out in the next election. Thus they added their seemingly rational voices to the already phenomenal circus about the “fiscal cliff,” a misnomer given to a reasonable (though not perfect) effort by Congress to whittle the insane deficit down a bit. Watch for these indices to climb back next year, even if the fiscal cliff stays in place [ Fear Mongering And Hysteria About The Fiscal Cliff ].

Here I am on Max Keiser’s show, “On the Edge,” for a tongue-in-cheek discussion of our surreal times. Note how he corrects me when I call the political system in Greece a “democracy.” No way. Not on his show! It’s a “kleptocracy,” he said, and calling it a democracy is just…. Priceless! Pauperization of America – Wolf Richter On Max Keiser’s “On The Edge”

For a funny, edgy, high-energy book about unforgettable car salesmen, their managers, and their shenanigans—I ran a big Ford dealership for a decade—check out my new novel, TESTOSTERONE PIT, and read the first few chapters for free on Amazon.

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