As consumers worry about inflation eating away at their spending power, CEO confidence fell in the second quarter for the fourth consecutive decline.
Geopolitics tensions, supply chain issues, inflation and even fears of a recession leave chief executives with no shortage of concerns, according to The Conference Board Measure of CEO Confidence in collaboration with The Business Council, a forum for CEOs of the world’s largest multinational corporations across all industry sectors.
The measure now stands at 42, down from 57 in the first quarter. A reading below 50 points reflects more negative than positive responses. The measure reached a high of 82 in the second quarter of 2021. That’s about the time when U.S. local economies began opening up and retailers and companies were met with an unprecedented level of demand as consumers went shopping after a year of sheltering in place.
“CEO confidence weakened further in the second quarter, as executives contended with rising prices and supply chain challenges, which the war in Ukraine and renewed Covid restrictions in China exacerbated,” Dana M. Peterson, The Conference Board’s chief economist, said. “Expectations for future conditions were also bleak, with 60 percent of executives anticipating the economy will worsen over the next six months—a marked rise from the 23 percent who held that view last quarter.”
The CEOs were surveyed about their expectations for the economy, as well challenges they are facing.
Fifty-eight percent said geopolitical tensions will likely divide global power into Western-democratic bloc and China-Russian sphere over the next five to 10 years. Thirty-six percent said the biggest challenge they face from economic sanctions against Russia for invading Ukraine are input shortages and supply chain issues, although 25 percent don’t foresee any significant challenges. And forty-seven percent said they are diversifying their sourcing to avoid future supply chain disruptions, adding that they cannot use solely U.S.-Mexico-Canada (USMCA) sources. However, thirty-five percent said they are not experiencing any significant disruptions.
When it comes to how the CEOs are managing input and labor costs, 54 percent said they were passing along input costs to customers, while 68 percent said they are increasing wages across the board and managing rising labor costs through “different means.”
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Fifty-seven percent expect inflation will come down over the next few years, but that tinkering with interest rates to tame inflation will cause a “very short, mild recession” called a “reverse soft landing.” Twenty percent believe inflation will stay elevated over the next few years and expect U.S. growth will slow significantly to a pattern that many call stagflation. While 12 percent believe inflation will lessen without a recession, or soft landing, another 11 percent said inflation will decline but the U.S. will have a challenging recession.
CEO expectations weakened in terms of both current and future conditions. Sixty-one percent said economic conditions worsened, up from 35 percent in the first quarter. More importantly, 37 percent said conditions in their own industries worsened, up from 22 percent. Looking out six months, 60 percent of CEOs expect economic conditions to get worse, up from 23 percent. In addition, 34 percent said they expect conditions in their own industries to get worse, up from 13 percent.
As concerns over the direction of the economy grows, 63 percent of CEOs now say they plan to expand their workforce, a slip from 66 percent in the first quarter. In addition, only 38 percent expect to increase their capital budget in the year ahead, down from 48 percent in the first quarter.
Walmart, Target and Kohl’s all missed Wall Street’s expectations largely due to supply chains costs and bottlenecks. Coming up in the weeks ahead will be reports on the state of consumer confidence. The University of Michigan Consumer Sentiment report is due out on Friday, and the more closely watched Conference Board’s Consumer Confidence Index is slated for the following Tuesday.