A note of caution, but hiring to continue.

AFTER A SURGE of confidence in May, CEOs appeared a bit more tentative in June. Energy costs and the certainty of higher interest rates figured in their more cautious tone. But significantly, and in a break with past trends, CEOs are showing no signs that they plan to slow down their hiring.

The broadest indicator, the CEO Confidence Index, eased slightly last month, from 172.8 to 169.5 (see chart, far left), and most of its components, such as Future Confidence and Current Confidence, also deelined. (For full results, go to www.chiefexecutive.net.)

But the surprise was that the only clearly positive indicator was Employment Confidence, which increased by 5 points, to 181.1. Nearly 1 million jobs have been added to the U.S. economy in recent months, and the most recent confidence numbers suggest that hiring will continue.

That's particularly significant in view of the concerns that CEOs show about some macroeconomic trends. When asked which would have the greatest impact on their business, some 42 percent of our 349 respondents said energy prices, versus 34 percent who cited interest rates. The remainder said they didn't expect either of those two factors to have an impact on their businesses (see chart, second from left).

"Clearly, the cost of energy has the potential to stop the growth and expansion of the economy," wrote Kenneth C. Beam, president and CEO of the Pegasus Logistics Group in Grapevine, Tex. "There is a point at which businesses and consumers will reduce spending to cover these 'necessary' inflated costs."

Many readers noted that interest rates already are low in the U.S. compared with some other countries, and they consider a move by the Federal Reserve to be necessary. "The Federal Reserve Board has no choice," wrote Robert A. Kegel, president of Kegel Engineering Associates in Scottsdale. Ariz. Like many prognosticators, he foresees a modest increase before the November election, followed by more hikes afterward. "It becomes essential that there be increases to attract additional foreign investment to the U.S. economy," he argues.

Few CEOs see either oil prices or interest rates as being serious threats to the overall economy. "We will all cry a little, but we'll be strong in the long run," wrote J.B. Lang of Advantech International in Somerset, N.J.

Elsewhere, two interesting trends have emerged in our supplemental data. The confidence of CEOs who manage companies of $250 million or more in sales is decidedly higher than that of CEOs of smaller concerns (see chart, second from right). As recently as the beginning of 2004, the small companies were more optimistic. Now it has reversed. Size and scale are arguably more important in today's globalized environment.

Second, the confidence of CEOs of privately held companies, after lagging behind that of their counterparts at publicly traded companies, has essentially caught up (see chart, far right). Could it be that not having to comply with the Sarbanes-Oxley Act makes private CEOs feel better about their businesses?

RELATED ARTICLE: THE NUMBERS

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Emerging Concerns

Which has the potential for having the greatest impact on your business?
Neither                     23.8%
Increased interest rates    34.1%
Energy Prices               42.1%

1 to 2 % over the next year
based on crude oil to be sold at $40 a barrel

Note: Table made from pie chart.