CEO confidence a statistic to watch

To say CEOs are a confident lot seems like mastery of the obvious. A strong sense of confidence is a prerequisite of the job. During times of expansion, every good CEO will tell you their company can out-compete its competitors. And when times are bad, they will insist they should still do better.

But there also seems to be a constant sense of apprehension affecting the person who is ultimately in charge. As Shakespeare says in Henry IV, Part II, "Uneasy lies the head that wears a crown." I know CEOs are not kings, but I bet many of them wish they were so they could decree an end to the issues causing them so much uncertainty at the present time.

From my perspective, these two opposing forces are what make a CEOs' job always interesting. And recently, I am particularly interested in CEO's confidence levels.

Each month, Chief Executive magazine surveys its database of CEOs in the U.S. across a wide variety of companies. Using a scale of 1-10, these executives are asked to rate their confidence levels in both the current and future business conditions. The data from this survey is broken down into subcategories, which include CEOs for manufacturers of industrial goods and manufacturers of consumer goods. It does not specifically report data from plastics industry CEOs, but I would be surprised if we are not represented in both these manufacturing categories.

The latest survey indicates CEO confidence in future business conditions fell 6 percent in August from July. At 6.2 out of 10 for the month, confidence in business conditions one year from now is at its lowest level since October 2016, which was the last time CEOs reported their outlook as "weak."

The chart of the recent trend in this data series is more illustrative than a point from a single month. During the first half of 2019, the trend was flat-to-up and it looked like confidence levels were recovering from the abrupt decline in December 2018. Last December, you will recall, the Fed hiked interest rates a quarter of a point and the stock market promptly plunged more than 15 percent. Those few weeks tested everybody's confidence levels, so I understand why the survey showed a dip in December.

But I am puzzled by last month's dip. For some combination of reasons, confidence levels hit a fresh 12-month low in August. The survey respondents reported a variety of causes for lower confidence. These included Chinese tariffs, worker shortages, rising debt levels, volatile equity markets, the presidential election and Brexit.

I admit this list of worries is more than enough to produce some level of apprehension in our nation's business leaders. But nothing on this list is new. This same list of worries could be attributed to the results of every survey this year.

What actually changed in August that makes the 12-month outlook now worse than it was in December? Keep in mind, interest rates have declined substantially in recent months, the stock market is up more than 15 percent for the year to date and household incomes are rising at their strongest rate in years.

I am not arguing with the confidence data; I am trying to interpret it. Historical analysis shows that confidence surveys are not always accurate predictors of the future. But that does not mean they should be ignored.

Most of the time, recessions are caused not by low confidence levels, but rather by what Alan Greenspan termed irrational exuberance. Asset bubbles caused by excessive speculation are the typical precursors to a recession. In these cases, it is too much collective certainty in surefire, future profits that precedes a collapse — not uncertainty about future risks. It was the profligate underwriting in unsecured mortgages and credit default swaps that precipitated the Great Recession a decade ago.

I cannot identify any asset bubbles at the present time, except maybe in the bond market. Nevertheless, I am not completely prepared to state that a recession cannot be the result of a self-fulfilling prophecy represented by low confidence levels.

CEO confidence is a crucial factor in a company's decisions to invest in new equipment or hire new workers. I can envision a scenario in which falling CEO confidence portends more rapid declines in the data measuring CAPEX and employment. And if the trend in those data series roll over into a clear downward trend, then you have a very reliable indication that a recession is imminent.

For further verification of the trend, the Conference Board also conducts a quarterly CEO confidence survey. Its most recent results produced a value of 43 in its Measure of CEO Confidence for the second quarter of this year. This value of 43, described in its news material as "moderately pessimistic," was unchanged when compared with the first quarter.

So, I will describe the trends in the CEO confidence data series from both the Conference Board and Chief Executive magazine through the first half of 2019 as mostly steady. The third quarter data from the Conference Board should be released in the first week of October, and that is the data point in its series that will include the intriguing month of August.

Maybe we will get a rebound in confidence levels in September. Or maybe CEO confidence will continue to head south, and we get confirmation of a downtrend from both surveys. Either way, they have my attention.

You can find more information about these CEO confidence surveys at https://www.conference-board.org/data/ceoconfidence.cfm and https://chiefexecutive.net/category/ceo-confidence-index/.