CEOs More Negative on the Economy & Jobs

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

October 4, 2011

IN THIS ISSUE:

1. Business Roundtable CEO Survey Deteriorates

2. Other Key Economic Reports of Late

3. Quick Update on the European Debt Crisis

4. Consumer Confidence Remains in the Tank

5. Obama Jobs Bill is a Nightmare!

6. Update on Texas Wildfires, Drought

Business Roundtable CEO Survey Deteriorates

The Business Roundtable (BRT) is an association of Chief Executive Officers of leading US companies with over $6 trillion in annual revenues and more than 14 million employees. Each quarter, the BRT surveys its members to get their outlook for the economy, job growth (or lack thereof), etc. The results of BRT’s 3Q survey of 140 top executives were released last Thursday, and the findings aren’t pretty.

The 3Q CEO survey by the BRT found that 24% of CEOs expected to cut jobs in the US over the next six months, more than double the 11% who had forecast that in the 2Q. Only 36% expected to add jobs, down from 51% in the 2Q. The group's CEO Economic Outlook Index dropped for a second consecutive quarter to 77.6, its lowest reading since the 4Q of 2009.

For most of the past two-and-a-half years, the CEO Outlook Index had been recovering from the record low of negative 5 hit in the first quarter of 2009, in the immediate aftermath of the financial crisis that brought down Bear Stearns and Lehman Brothers. Early this year, it reached 113, its highest reading since the group started taking the survey in December 2002.

Since then it has been all downhill. Spooked by the deepening European debt crisis and the recent budget standoff in Washington, among other things, the CEOs’ consensus view of the economy deteriorated sharply in the 3Q. Boeing CEO Jim McNerney who chairs the Business Roundtable summed it up this way:

"This past quarter was a challenging one for our economy. It brought high oil prices, continuing European sovereign debt crisis, our own debt-ceiling debate and the S&P downgrade in the US, which in sum added to an already uncertain economic and business environment."

The number of CEOs who expected their companies' sales to rise over the next six months fell to 65%, down from 87% in the 2Q, and the number who expect to boost capital spending fell to 32% in the 3Q, down from 61% at the end of June.

Overall, CEOs look for US Gross Domestic Product to rise only 1.8% this year, sharply lower than the 2.8% growth forecast in March. Even 1.8% looks like a stretch for this economy. Remember that GDP rose only 0.4% in the 1Q and as discussed below, 1.3% in the 2Q. That’s an average of 0.85% for the first half. Thus, I won’t be surprised if the CEOs further reduce their forecast later this year.

The latest Business Roundtable CEO results are consistent with the Conference Board’s CEO Confidence Index that was released back in July for the 2Q. That index plunged 12 points – from 67 in the 1Q to 55 at the end of June. Obviously, both of these surveys are reflective of a decelerating economy.

Other Key Economic Reports of Late

The Commerce Department released its third and final estimate of 2Q GDP last Thursday, showing a modest improvement from the previous report.  Today’s report shows 2Q GDP rose 1.3% (annual rate), up slightly from 1.0% in the last report. This number was slightly better than the pre-report consensus of 1.2%.

Today’s GDP report probably serves to lessen fears that the economy has slipped back into a recession in the 3Q, but such confidence may be misguided. The fact is, we won’t get our first glimpse into 3Q GDP until near the end of October. That is when the Commerce Dept. will release its advance estimate of 3Q GDP. Until then, we just do not know.

The other report released this morning was “initial claims” – the number of people filing for new state unemployment benefits during the week ended September 24. Today’s number came in at 391,000, well below the pre-report consensus. That is down from 428,000 in the previous week and is the first time the number has been below 400,000 since the first week in April.

Both reports were well received by the markets, and US stocks opened sharply higher the day after these reports were released. However, I continue to believe that the major trend in stocks is down, but as you can see in the chart, we’ve been in a broad trading range since early August.

DJIA Nearest Futures

Quick Update on the European Debt Crisis

I also continue to believe that the main driver in the stock markets continues to be the European debt crisis. Of late, there is some encouraging news on this front, if you can call it that. As of today, most (but not all) of the 17 Eurozone countries have voted in favor of funding the European Financial Stability Facility (EFSF) at the initial level of €440 billion which was agreed to by the leaders back in July. As I have written often, things move very slowly in Europe.

The EFSF votes that you have been hearing about in the news over the last week or so do not reflect what was discussed at the latest IMF/G-20 meeting last weekend in Washington, which I wrote about at length in my E-Letter last Tuesday. At that meeting, there were discussions about leveraging the EFSF up to at least €2 trillion in order to bail out Italy and Spain if needed.

At that same meeting, the leaders talked about a new TARP-like rescue fund of apprx. €150 billion to recapitalize Eurozone banks. And there was talk of allowing Greece to default on up to 50% of its debt – if the EFSF is expanded and the Euro-TARP is in place. At the earliest, these measures won’t be voted on until late October, if at all. The point is, a lot could still go wrong or fail to materialize in Europe just ahead, and this could continue to be a negative influence on global equity markets. For now, assume we are still in a bear market.

Consumer Confidence Remains in the Tank

Last Tuesday, the Conference Board reported that the Consumer Confidence Index was basically flat in September after falling off a cliff earlier in the summer. The Index was 45.4 in September, up fractionally from 45.2 in August. You may recall that the Index plunged 14 points in August alone. The Conference Board noted the following:

“The pessimism that shrouded consumers last month has spilled over into September. Consumer expectations, which had plummeted in August, posted a marginal gain. However, consumers expressed greater concern about their expected earnings, a sign that does not bode well for spending. In addition, consumers’ assessment of current conditions declined for the fifth consecutive month, a sign that the economic environment remains weak.”

Conference Board Consumer Confidence Index

Consumer spending accounts for apprx. 70% of GDP, so the fact that the confidence index remained very low once again this month does not bode well for a significant upturn in the economy in the 3Q. Doug Short of Advisor Perspectives created another very interesting table in his latest report:

Consumer Confidence Index During Recessionary Periods

Using historical data from the Conference Board, Doug illustrates the average levels of the Consumer Confidence Index during  each of the last five recessions. As you can see, consumer confidence in the recession and financial crisis of 2007-2009 was the lowest of any time in the last 30 years. Notice in the chart above that it almost fell to zero near the end of the recession. As noted above, the index has continued to fall to 45.4 in August.

This does not bode well for the economy improving significantly anytime soon.

Another report of note last week was durable goods orders for August. The report found that new orders for long-lasting US manufactured goods slipped 0.1% in August on weak demand for motor vehicles, after rising 4.1% in July. The number was weaker than the pre-report consensus. Personal income and spending for August are due out tomorrow, and both are expected to fall below July levels.

On Friday the Commerce Department reported that personal income fell 0.1% in August following an increase of 0.1% in July. The August reading was below the pre-report consensus. The Commerce Dept. also reported that personal spending rose by 0.2% in August for the second month in a row.

Obama Jobs Bill is a Nightmare!

I trust that everyone reading this has heard about President Obama’s new $450 billion “jobs bill” that he is urging Congress to pass. But I’ll bet you haven’t heard this:  Mr. Obama’s jobs bill would prohibit employers from refusing to hire job applicants who have been out of work for a long time. What, you haven’t heard about this?

Under the proposal, it would be “an unlawful employment practice” if a business with 15 or more employees refused to hire a person “because of the individual’s status as unemployed.” Unsuccessful job applicants could sue and recover damages for violations, just as when an employer discriminates on the basis of a person’s race, color, religion, sex or national origin.

Mr. Obama’s proposal would also prohibit employment agencies and websites from carrying advertisements for job openings that exclude people who are unemployed. The Equal Employment Opportunity Commission has received reports of such advertisements but has no data to show how common they are.

Representative Louie Gohmert (R-TX) said the president’s proposal would, in effect, establish the unemployed as a new “protected class.”

Mr. Gohmert said the proposal, if passed, would encourage litigation by sending a message to millions of Americans: “If you’re unemployed and you go to apply for a job, and you’re not hired for that job, see a lawyer. You may be able to file a claim because you got discriminated against because you were unemployed.”  I’m sure the trial lawyers are cheering!

Update on Texas Wildfires, Drought

Since we have clients in nearly all 50 states, a lot of them have called to inquire how we have weathered the outbreaks of wildfires recently. The worst wildfires occurred in Bastrop County just east of Austin as shown below. The blaze that broke out over the Labor Day weekend torched over 35,000 acres and destroyed over 1,500 homes, with two deaths and many injuries.

Another wildfire broke out at the same time in western Travis County (near where I live on Lake Travis) burned several thousand acres and destroyed dozens of homes, some of which were less than two miles from where I live. Just yesterday, another wildfire broke out just a few miles from our office building, supposedly sparked by lightening from a small isolated thunderstorm.

Bastrop Fire

(Click picture for larger version.)

Much of Texas is going through a record, or near-record, drought. Central Texas where we live has registered the driest year on record. We also eclipsed the record for the most days when the temperature reached 100 degrees or above. We had several days when the temps were 110-114. Lake Travis is less than 40% full at this point and is over 30 feet below its normal level for this time of year.

Meteorologists tell us that this weather pattern is not likely to change anytime soon. To those who have called or e-mailed, thanks for thinking about us!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Bernanke: Economy is growing more slowly than expected.
http://finance.yahoo.com/news/Bernanke-says-economic-apf-1142268665.html?x=0&sec=topStories&pos=7&asset=&ccode=

How Europe’s Crisis Can Tip U.S. into Recession
http://www.thefiscaltimes.com/Columns/2011/10/03/How-Europes-Crisis-Can-Tip-US-into-Recession.aspx#page1

Greece has weeks left before bankruptcy
http://finance.yahoo.com/news/Greece-has-weeks-left-before-apf-1533046240.html?x=0&sec=topStories&pos=8&asset=&ccode=


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert, Mike Posey (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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