Business Roundtable First Quarter 2008 CEO Economic Outlook Survey Media Conference Call Transcript of Briefing by Harold McGraw III
OPERATOR: Ladies and gentlemen, thank you for joining Business Roundtable's briefing on its first quarter 2008 CEO Economic Outlook Survey. At this time, all telephone participants are on a listen-only mode. Later we will conduct a question-and-answer session, where you will be given the opportunity to ask questions about the CEO Economic Outlook Survey. If you should require assistance during the call, please press star, then zero. I will now turn things over to our host, Mr. Harold McGraw III, chairman of Business Roundtable and chairman, president, and CEO of The McGraw-Hill Companies. Mr. McGraw.
HAROLD MCGRAW: Thank you, Rose. And thank you everybody and good afternoon, and welcome to this conference call. As Rose was saying, I am Terry McGraw. I'm chairman of the Roundtable and chairman and CEO of The McGraw-Hill Company. The members of Business Roundtable are all chief executive officers of the nation's leading 160 companies. Collectively we represent nearly 10 million employees and roughly $4.5 trillion in annual revenues. The Roundtable incidentally began this quarterly CEO Economic Outlook Survey a little over five years ago in the fourth quarter of 2002. And today we are announcing the results of our first quarter 2008 CEO Economic Outlook Survey, which reflects the sentiments now – it reflects the sentiments of our member CEOs towards their business plans and prospects over the next six months.
Now, this survey was conducted between March 10th and March 27th and was completed by a cross-section of 100 Business Roundtable CEOs. Before I take you through the specific findings of this quarter's survey, let me take a moment to address the current economic climate. There is obviously no question that the U.S. economy has slowed significantly. In fact, as you no doubt know, some economists say that portions of our economy are currently in recession. That said, the Fed's recent actions to inject more liquidity into the system are expected to have a positive impact in the months ahead. And additionally, the export sector continues to be a bright spot for companies actively engaged in the international economy. In fact, the U.S. exports increased by a sharp 8.4 percent between the fourth quarter of 2006 and the fourth quarter of 2007. And that is even after accounting for inflation.
I highlighted this improvement point because as you will hear, the results of this quarter's survey reflect the reality of its participants. The majority of these companies are actively engaged in the international economy and continue to see strong export growth bolstering their businesses as well as their economic outlooks despite a general softening of domestic economic conditions. As always, this quarter's Business Roundtable's CEO Economic Outlook Survey is a predictive survey designed to take a picture of where the economy is heading based on companies' order books, their sales force information, and their worldwide demand. And we have asked member CEOs about their expectations during the next six months for company sales, capital expenditures and employment.
Okay. Let me now share with you this quarter's survey results. Despite the strong cross currents facing the U.S. economy, this quarter's CEO Economic Outlook Index remains steady showing unchanged expectations in the three areas of sales, capital expenditures, and employment compared to our last survey, which was released in December 2007. Specifically, the first quarter 2008 index remained unchanged from the last quarter at 79.5 percent. And here are the detailed survey results, and you can find a chart comparing these results with the previous quarter's at www.businessroundtable.org/ceosurvey. That is www.businessroundtable.org/ceosurvey.
On the three areas, let's begin with sales. On sales, we saw a modest increase over last quarter's survey. Seventy percent of the member CEOs anticipate sales will increase in the next six months, same as last quarter, 21 percent expect sales to remain the same compared with 17 percent last quarter, and nine percent project that sales will decline, compared with 13 percent last quarter.
On capital spending, member CEOs' expectations remain relatively level compared with the last quarter. Thirty-five percent of CEOs are projecting higher spending in the next six months, same as last quarter. Fifty-percent are expecting spending to remain the same, and that is compared with 51 percent last quarter. And 15 percent are projecting a decline, and that is compared with 14 percent last quarter. Of note is that 85 percent of our member CEOs still plan to increase their cap-ex spending or at least maintain their current level of spending relative to the last quarter.
In employment, employment projects, again, reflect very little change from our last survey. Thirty percent of member CEOs expect to add employees compared with 33 percent last quarter. Forty-eight percent expect employment to remain steady compare with 45 percent last quarter. And 22 percent project lower employment and that is the same as the last quarter report.
In their projections for overall economic growth, member CEOs are assuming on average GDP growth of 1.5 percent in their business plans. This is the lowest assumed GDP rate since we began the survey in 2002. So we look for trends in our data, and this survey shows only horizontal movement resulting in a Business Roundtable's CEO Economic Outlook Index of 79.5, the same as the last survey. And I want to remind you that ours is a diffusion index, and it is centered on 50. So anything above 50 is expansion, and anything obviously below 50 is contraction. And as I said last quarter, the index remains above the 50-to-68 range that we saw in the late-2002, early-2003 time period as the economy recovered from the last recession.
The methodology of this quarterly survey has remained the same since it was launched in 2002 incorporating, again, our member CEOs' expectations on sales, capital spending and employment. In closing, these results are a testament to strong export growth as well as their involvement in international businesses. This underscores the importance of taking advantage of overseas markets as a way of writing-down a downturn here in the U.S. economy. For the employees, the shareholders of our companies, this participation in the international marketplace is crucial to success. This should be instructed to those who had criticized international trade. It also should be a wakeup call for some of the presidential candidates who would like to put out the closed sign on trade agreements. Increasingly the economic growth expands beyond our country's borders. Ninety-five percent of the world's population outside of our borders only by engagement will we be able to continue to succeed. And I might add the days when the United States' economy was 45 percent of world GDP are well behind us. We are only 20 percent of world GDP, and that will continue to decline as the rest of the world and the developing economies continue to grow.
While this in no way ameliorates the pressure on our country's economy, it does reflect our members' economic reality. We are all concerned about the housing crisis and the families that it impacts and the impact on the financial services industry. Congress and the administration have announced initiatives and steps to address the turmoil, and we support action to ensure a healthy economy and a continued recovery.
Let me leave it with that at this point. Again, thank you for being with us. And I think we can open it up and go in any direction anyone would like.
OPERATOR: Thank you. And if you are on the phone and want to ask a question about the Roundtable's CEO Economic Outlook Survey, please press star, then one on your touchtone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at anytime by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star, one. We request that you limit your questions to the CEO Economic Outlook Survey, and we will now take your questions. And we have a question from Scott Malone with Reuters. Please go ahead.
Q: Hi. One thing that your release doesn't talk about at all is what CEOs' specific concerns are beyond broadly just the idea of the economy slowing down. And I'd be curious, specifically, if you had gotten any feedback on the credit crunch and, you know, to what degree access to capital is becoming a concern for them?
MR. MCGRAW: Well, thank you, Scott. Again, in terms of the survey itself, it really is an outlook over the next six months and we really keep it confined to sales, capital expenditures, and employment. And it's their expectations of what their business plans are going to do. We don't get into specific issues as they relate to the economy. I can say very clearly that everyone understands and feels that the economy has slowed down, whether it be the accumulation from the housing recession, the oil prices or other commodity prices that are at record highs, or the effect of all of these things.
Now, you know, given the fact that we have a stimulus package that will have an effect in the third and fourth quarter of this year, the 1.5 percent growth is a pretty good number and it does indicate that the first half of this year is obviously significant. Whether we're definitionally in a recession or not doesn't matter; it's recession-like. And people are feeling it. And we're seeing it in confidence numbers and all sorts of things like that.
But we expect roughly three percent growth in the third quarter from the stimulus package, 2.5 percent in the fourth quarter from the stimulus package, and then the monetary policy and all of the things that the Fed has done should have an effect. The question is the extent to which it does as we get into 2009. But, at this point, the sentiment clearly is that the economy has clearly slowed down, that the stimulus package will have a positive impact for two quarters, and then the hope is that monetary policy would kick in.
Q: Thank you.
MR. MCGRAW: Thanks, Scott.
OPERATOR: And next we have a question from Peter Coy with BusinessWeek Magazine. Please go ahead.
Q: Hi. Business Roundtable is made up of very large companies. I'm just curious if you believe that being big in itself is something that helps the company at a time like this, or is it just because your member organizations tend to be more export oriented than the rest of the economy?
MR. MCGRAW: Yeah, thanks, Peter. Well, obviously, you know, size and scale has a very positive impact. But the other word is the diversification. You know, these companies have, for the most part, very large products- and/or business-line diversification, but, most importantly, they have geographic diversification. And, clearly, if we go back a couple of decades when the United States was 45 percent of the world GDP, when we got a cold, the rest of the world definitely got one. What we're seeing here is that at a lower percentage, 20 percent of world GDP, that the issues associated with the economic downturn are not necessarily having the same effect on other developed or developing countries on that one. So size/scale clearly are important, but diversification – both product- and business-line as well as geographic – are having the effect.
Q: Uh-huh. Thanks.
MR. MCGRAW: Thanks, Peter.
OPERATOR: And, once again, if you have a question at this time, please press star one. And we do have a question from Jim McTague with Barron's. Please go ahead.
Q: Yes, you've partially answered it, but, just for clarification, on the president's stimulus package, the capex spending has remained the same yet there's a capex component in the stimulus package. You seem to think, though, that exports and not that – you seem to be giving more weight to exports for cap of spending remaining the same as opposed to the stimulus. I might be asking you something that you can't answer, but do you have any idea of how many people are going to make capex expenditures because of the tax breaks in the stimulus package?
MR. MCGRAW: Yeah. Thanks, Jim. You know, again, the part that I found very interesting in this survey was that 85 percent of our members planned to increase their capex spending or at least maintain that current level of spending. And that's pretty encouraging and that's a six-month outlook. So that part is pretty encouraging.
As far as the stimulus package goes, again, a lot of the accumulated depreciation and a lot of the issues that were put in the stimulus package were more associated with smaller businesses and to be able to take advantage of that. So I think that's where you'll see that. I think clearly the fact that export growth is so robust and the like, that is where, for the most part, companies of this size are going to benefit.
Q: Thank you.
OPERATOR: And we do have a question from John Siciliano with Inside Washington. Please go ahead.
Q: Hey, Terry. I had a question and I know you don't, again, specific issues. I'm with the energy group over at Inside Washington and I just wanted to see if – you're talking about capital expenditures. I just wanted to see if there was anything you could say about energy companies' investments. And there's a lot of oil companies and coal companies that are looking at carving out new markets and possibly doing more refinery expansions. I was just wondering if you could comment on that.
And, also, I mean, you talked about some praiseworthy aspects of the stimulus package. Is there anything else on Capitol Hill that might be gaining your attention or the roundtable's attention?
MR. MCGRAW: Yeah. Thanks, John. Energy – wow! You know, we have seen such enormous increases in price here and it wasn't that long ago, we were $20 a barrel. And now you're – it's as high as $112. The impact that has – and I don't want to speak for the oil and gas sector specifically, but obviously the impact on oil companies is pretty dramatic.
When you're paying, you know, if you're going into the spot market to buy crude and then you're going to have to put it through your refineries, you know, the financials, the numbers get pretty disappointing. So what you'll see is more of a curtailment probably of that waiting for some of the price to recover better before you'll see that. Exploration, you know, is still clearly very, very expensive. You're going to some of the most difficult places in the world to get it and with a very dour oil exploration, gas exploration here in the United States in terms of a desire to build energy supply. That just puts more pressure and more cost on getting it elsewhere.
And when you do, that crude is usually from Venezuela, Nigeria, Northern Canada, the sands, all of those kinds of areas. That crude is very heavy and very dirty. And it takes a lot of effort to refine that. So from my standpoint, it's a very difficult environment and you need to see the price come down before I think you're going to see any kind of robust movement on that. Now, as far as the stimulus package goes, I think we all are very pleased, one, that there is one and secondly that it passed so quickly. I think that gives a lot of credit to both the administration and Congress to move that quickly. I wish we had moved so quickly on some other things like on that one.
Now, what more could you do on this one? You could see another interest-rate move on that one, but you're going to start getting into limited space here on that one. You could see some more pressure with tax credits or something of the like. But, really, you're getting pretty low in terms of what's in the closet to be able to use here other than further tax cuts on that one and that, in a political season, is a very difficult kind of issue.
So I think it's getting pretty thin. The hope has to be that monetary policy, which usually takes about nine months to kick in after interest rates start to decline, or once you start cutting rates, should put us into a more positive situation towards the end of the year and into 2009. But, again, there's a high level of uncertainty about those and we'll have to see.
Q: Can you comment on the recently passed energy bill? I don't know if you have an opinion on that or it's – I mean, certainly your members probably do.
MR. MCGRAW: Yeah. I think that, you know, again we're not talking comprehensive energy legislation. It is definitely helpful but, the question, that keeps getting argued is the whole argument of independence versus supply. The name of this game is energy supply, and we need to do that at the same time that we need to be investing robustly into the alternatives. And you've got lots of issues associated with that, dependent upon what alternative you're talking about. But again, in terms of, you know, a comprehensive energy legislation we need to, you know, continue to work on energy supplied from the standpoint of oil. And we need to see more expansion, will increasingly be more important, of gas. And we certainly, along with the alternatives, as important as they are, need to have a conversation, obviously, that includes nuclear. And that's a discussion that seems to be very difficult to get started, but one that we're eventually have to.
Q: Okay. Is there any legislation or legislative pack, as you're seeing, that the Roundtable might be backing towards increased supply?
MR. MCGRAW: Yeah, I mean, again, we would like to see, obviously, as the oil and gas industry does more exploration here at home. But again it's a political environment and I think that's a very difficult conversation at this point, but we had hoped to have that.
It's not in the energy field John but, you know we're strongly supportive of is obviously the trade agenda. And we are very, very strong and hopeful that we can get a meaningful conclusion to the multilateral Doha development agenda. And I think we still have an opportunity to do something in 2008, and I hope that we take advantage of that, all of us, in that one.
Outside of that, we have remained at this point, as you know, three free-trade agreements. Colombia, which is very important; it's very important in terms of our standing in that region, our support within that region, the relationship with Colombia and all that they're doing. And I can't say enough about President Uribe and what he has done to bring, you know, stability back to that country. Colombians are coming home and the United States needs to, you know, show not only its friendship and the importance Colombia is in the region, but also to take advantage of our own best economic interests, which is through the, you know, pan-Andean preferences. We have already benefited, you know, by opening our markets to Colombians, and now we have to complete that process with the free-trade agreement.
Panama, I think, is one that will resolve itself probably in September. There's an issue with, obviously, one individual and I think that will resolve itself. And then, Korea. And Korea will be the largest, most meaningful, most comprehensive free-trade agreement that we could pass, and that's – the Asian market is so important to us, and only increasingly will be. And before you can start talking about economic partnership agreements with Japan or elsewhere, if you can't pass the Korean free-trade agreement, what prospects do you think you have to develop further, you know, the kind of economic relationships we need in the Asia-Pacific region. So Korea becomes very important, and that's a pure dollars-and-cents. That's a pure business relationship, and very important.
Q: Wow. Thanks a lot, Terry, appreciate it.
MR. MCGRAW: Thanks, John.
OPERATOR: And we have a question from Scott Malone with Reuters. Please go ahead.
Q: Hi. Just one quick follow-up here; I think you've explained it, but I just want to be sure: I mean, obviously we're seeing a disconnect here with the forecast for GDP growth down, yet the overall outlook holding steady. It seems that we're seeing as the answer to that is whatever, you know, the businesses lost at home can be made up overseas in export markets. If that's the case, specifically where are they looking? Is it – you know, I mean, we're hearing now concerns about Europe slowing down. Is it all an emerging market story or, you know, where is that growth going to come from?
MR. MCGRAW: Well even with all that's going on we are seeing positive growth in all five of the basic regions, whether it be the European Union, Japan, Asia excluding Japan, and Latin America. So we're seeing positive growth. You're seeing pretty darn good growth in the large developing countries. India, which is growing this past year at about 11.5 percent, will at least grow at 10 percent this year. China will be growing probably about eight percent, Russia, you know, seven and Brazil five; very, very good growth. And we've seen, you know, world GDP, you know, contract a little bit. The latest number that I've seen was about 3.9 on that one, which is down from just below five percent a year ago. So we're seeing some contraction on that. I think we're having a pretty big effect on that. But the other developed countries that we're talking about, obviously, are lower, slower growth in that one. So I think it's the Asian markets, it's the large developing countries, and keeping all the developed countries in positive territory.
Thanks, Scott.
Q: Thank you.
OPERATOR: And once again, if you do have a question at this time, please to press star one. And there are no questions in queue. Please continue.
MR. MCGRAW: Okay. That ends our Economic Outlook Survey for the first quarter this year, and we will be, you know, obviously very interested in seeing what the second quarter does as we play out, you know, a softening first half of this year benefiting from a stimulus package in the third and the fourth. And these will be the expectations that CEOs plan to do, again, those kinds of things.
Thank you all very much for participating with us. Thanks.
OPERATOR: And this concludes Business Roundtable's briefing on the first quarter of 2008 CEO Economic Outlook Survey. A transcript of today's – of this call will be available later today. Please visit www.businessroundtable.org for more information.
Thank you.
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