OPERATOR: Ladies and gentlemen, thank you for joining Business Roundtable’s briefing on its Second Quarter 2007 CEO Economic Outlook Survey. At this time, all telephone participants are in 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. And as a reminder, this conference is being recorded.
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 Company. Mr. McGraw, please go ahead.
HAROLD MCGRAW III: Thank you very much, Gabby, and good afternoon. And thank you all for joining. As Gabby said, I’m Terry McGraw and I’m chairman of the Business Roundtable, as well as chairman of the McGraw-Hill Companies. And the Business Roundtable is made up of roughly 160 of the nation’s leading companies. We collectively represent roughly 10 million employees and $4.5 trillion in annual revenues.
Today we are announcing the results of our Second Quarter 2007 CEO Economic Outlook Survey, which reflects our company’s outlook for economic growth, and that is over the next six months. Each quarter when we do this, it’s over the next six months out. The survey was conducted on May 11th through May 23rd, and was completed by 100 Business Roundtable CEOs.
The survey shows that CEOs see favorable business conditions continuing over the next six months, although the index suggests some minor flattening of some of the economic momentum. The CEOs’ projection for sales, employment, and capital spending all reflect that steady economy with no significant acceleration or slowing over the next six months. Here are the specific results, and you can find a chart comparing these results with previous quarters at the Roundtable website. And just for everybody’s information, that's www.BusinessRoundtable – all one word – .org/ceosurvey. That is www.BusinessRoundtable.org/ceosurvey.
Okay, to the details. On sales, we saw a modest increase over the last quarter’s survey. Sixty-six percent of the companies anticipate sales will increase in the next six months. Twenty-six percent expect sales to remain the same, and only 7 percent project that sales will actually decline. On capital spending, we saw a slight decline in CEO’s intentions to increase their capital spending from last quarter. Thirty-four percent of the companies are projecting higher spending in the next six months. Forty-four percent expected an increase in the last survey, so that is down. Fifty-three percent are expecting to remain the same. And 14 percent are expecting a decline.
To provide some context, while this is a small reduction in the numbers, it is not a sharp decline. Overall, 87 percent of our CEOs still plan to increase their capital expenditure spending or at least maintain their current level of spending. Let me repeat that. Eighty-seven percent of our CEOs still plan to increase or at least maintain their current level of spending. Obviously, some sectors of the economy are facing challenging conditions. For example, housing, construction – and really there, we are talking about residential construction – and sectors directly affected by higher energy costs. So this is – so this result is not surprising.
Employment projections were very similar to those in our last survey. We saw a slight up-tick in hiring expectations, with 42 percent expecting to add employees, only one-third, 33 percent of the CEOs predicted adding employees in the last survey. One-third of CEOs in this survey expected employment to remain steady, and 25 percent projected lower employment. And the last survey, it was 21 percent.
In their projections for overall economic growth, CEOs are assuming that U.S. GDP growth will be 2.6 percent for 2007. Now, this projection is slightly more optimistic than the consensus view of private economists who project a range of 2 to 2.5 percent for GDP in ’07. Collectively, these results have produced a slight dip in the Business Roundtable’s CEO Economic Outlook Index to 81.9 percent from 84.9 in the first quarter survey. And, again, just to remind everybody, this is a diffusion index, and it’s centered on 50 so that any figure above 50 is expansionary anything below is contraction.
As I said last quarter, the index remains well above the 50-70 – 50 to 70 range that we saw in the late 2002, early 2003 period as the economy recovered from the last recession. So, again, these results show that America’s CEOs are maintain their generally favorable view of the economy, even with the pressure of energy prices. It is our belief that while the economy appears to be settling into a somewhat softer consolidation phases. As long as consumers keep spending, and they have, the economy can continue to move ahead.
Finally, the other recent economic indicators such as the consumer index, confidence index, which shot up in May, and minutes from the fed’s May 9th meeting released last week, appear to reaffirm that the economy is on solid footing with conditions pointing to our continued moderate growth going forward.
Okay, let me hold it there. That is the detail from our second quarter economic outlook survey, and we can go in any direction anybody would like.
OPERATOR: Okay, ladies and gentlemen, 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’ll hear a tone indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing the pound key. If you’re using a speakerphone, please pick up you handset before dialing. We request that you limit your questions to the CEO Economic Outlook Survey, and we will now take your questions. We will go first to the line of Scott Malone with Reuters. Please go ahead.
Q: Hi, yeah. What I was kind of looking at and a bit puzzled by is we’re seeing a bit of a mismatch in their intents on capital spending versus the intent on employment. And I’m just wondering if you can give us any color as to what that might be indicating – I mean, that seem – that they are still pushing on the hiring side while pulling back on the capital spending side. Is that maybe a bit of a sense of – they are willing to spend a little more for the time being, but they don’t want to get tied up in any long-term commitments. I mean, what is the sense there?
MR. MCGRAW: Well, Scott, thank you for the question. I think it really is much more of a sentiment of CEO’s being cautious given the fact that the economy has slowed down. And it has slowed down according to plan given a very accommodative fed policy coming out of 2006.
So what we are seeing at this point is in 2006 equipment spending was at about 6.5 percent. Projections for 2007 are about 2 percent and for 2008, most economists have them going back up into the 6-percent range.
So what I think you’re seeing is that there is a cautiousness, that if sales, you know, might have a little bit of doubt in them, then we ought to be a little bit more cautious on the equipment spending, and I think that is what you’re seeing.
Q: Thank you.
OPERATOR: Thank you. And once again, if you have a question, please press star-1 now. We have a question from Steve Matthews with Bloomberg News. Please go ahead.
Q: Hi. Terry, I’m interested in your thoughts on the housing market. Particularly, are we going to have a home-price decline this year with sub-prime essentially imploding in March? Has that been felt yet in the figures or do we still have some fallout from that yet to come.
MR. MCGRAW: Yeah, thanks, Steve. Well, you know, if you’re looking at possible scenarios of what could go wrong, certainly the housing market is a big factor. The first quarter GDP growth was 0.6 percent, and that was obviously a lot lower than most people thought it was going to be. And even though there was a lot on inventories there, you also have the effect of the housing market on that one.
Now, I think at this point that we are near or at a bottom on the housing. Yet, you’re going to have obviously a lag effect for the rest of the year and probably into next year, both in terms of a little bit more price decline, but also in terms of some defaults and foreclosures, you know, as you mentioned with the sub-prime market. So I think there is lower financial risk, higher headline risk associated with that. But housing certainly is one that we have to watch. But for the most part, we think we’re at or near a bottoming.
OPERATOR: (Off mike) – Mr. Matthews.
Q: Yeah, just as a follow-up to that, do you think that this is having an effect on consumer spending if you look at, you know, some of the retail spending figures or even companies like Wal-Mart, Home Depot. I mean, you name your favorite retailer. There seems to be quite a bit of weakness.
MR. MCGRAW: Actually, you know, Steve, the consumer confidence index, numbers have improved. And the consumer continues to spend. You know, consumer consumption is still one of the things that we’re clearly counting on for these kind of growth projections. So, no, we don’t see that kind of weakness. We think the consumer spending remains relatively strong and should continue.
Q: Great. Thanks very much.
MR. MCGRAW: Thanks, Steve.
OPERATOR: Thank you. We’ll go next to Michael Burnham with Greenwire. Please go ahead.
Q: Hi, Terry. I was wondering if you could elaborate a little on the effects higher energy prices are having on the CEO’s outlook. And secondly, maybe give us a preview as to the Roundtable’s energy blueprint to be unveiled tomorrow in Washington.
MR. MCGRAW: Okay. Thanks, Michael. You know, higher energy prices create some potentially very large distortions. We have seen oil in the early 60s ranging up to 65, and it’s been pretty steady in that particular range. You know, we have to watch very carefully in that situation any kind of supply shortages, you know, like – that could create higher oil prices would have certainly an effect on the economy. And it also would affect not only those industries like the transportation sectors, but it would also have an effect on the consumer and consumer spending. So that is one that we want to watch obviously very careful, along with the housing.
As to the conference tomorrow and the blueprint plan, Michael, I would rather leave that one. You know, it wouldn’t be very polite of me to steal their thunder. And I hope that you’ll have an opportunity to listen in because this is absolutely a very critical and an important issue that has to get some resolution. And I think we have some very, very good answers. And you’re going to be hearing from people that live in that industry.
Q: Thank you.
MR. MCGRAW: Thanks, Michael.
OPERATOR: And we also have a question from Diana Greg with BNA. Please go ahead.
Q: Hi, yes. My question is with employment since there is a slight improvement from the previous survey, and I was wondering whether you do have any sense of which companies or which sectors are doing that.
MR. MCGRAW: Okay, we don’t break it down, you know, by company that way, Diana, but, again, from a sentiment standpoint, it is consistent with the fact that the projections for sales and the projections for growth are relatively stronger than most economists would have it. So I think that the employment picture that you’re seeing is in keeping with the fact that CEO’s sentiment is more positive for growth.
Now, a 2.6-percent growth for the year, which is the CEO’s projection, that means that you’re going to – you know, if you had a 0.6 percent first quarter, that suggests that you’re going to have a pretty strong compared to what most expect it the second half of the year on that one. And I think right now, most economists think that the economy will grow about 3 percent in the second quarter, and that would suggest somewhere around 2.5 percent for the second half.
So I just think that it’s a more positive picture in CEO’s minds, and correspondingly in the employment.
OPERATOR: Is that all Ms. Greg?
Q: Yes, thank you.
MR. MCGRAW: Thank you, Diana.
OPERATOR: Thank you. Then we have no further questions, Mr. McGraw. Please go ahead with any closing remarks.
MR. MCGRAW: Right. Well, thank you again, all of you, for taking time out to hear us. Again, this is a sentiment survey, and it’s for the next six months. And I think the takeaway is that the economy is solid; it is steady; and it’s actually a little better than some of the projections that others have had. And I think that is positive. And I thank you all for taking time to be with us.
OPERATOR: Thank you. And this concludes Business Roundtable’s briefing on the Second Quarter 2007 CEO Economic Outlook Survey. A transcript of this call will be available later today. Please visit www.BusinessRoundtable.org for more information. Thank you.
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