As Oil Prices Drop, CEO Confidence Rebounds Slightly; 2006 Outlook Brightens, Rising Interest Rates a Top Concern.

SAN DIEGO -- After reaching a survey low last quarter, the Q4 TEC Confidence Index rebounded slightly, demonstrating improved economic confidence for 2006 from CEOs in small and mid-sized businesses nationwide.

More than 1,600 CEO members of TEC International, the world's largest organization of chief executives, responded to the Q4 survey. The most significant change, which upped the confidence level from last quarter's survey (which was conducted immediately after Hurricane Katrina made landfall), was increased confidence in expected economic conditions for the next 12 months.

The confidence level, now at 99.2 from 96.9 last quarter, is close to the benchmark of 100, which was established in Q2 2003. About one-third of CEOs expect economic conditions to be better in the next 12 months than they are now, while 48 percent expect conditions to remain about the same. On average, a majority of CEOs expect to see increased sales revenues, profits, investments, and employee numbers.

"Prospects for the economy have improved substantially from the lows recorded immediately following the Gulf coast hurricanes and the surge in gas prices. Firms still expect a slower overall pace of economic growth during 2006 than in 2005. The expected growth slowdown is mainly due to anticipated increases in interest rates," said Richard Curtin, Ph.D., a consultant for the TEC Confidence Index and director of consumer surveys at the University of Michigan. "Firms are much more optimistic about their own prospects in 2006, as they expected strong growth in revenues and profits."

Hot topics this quarter include a drop in concern regarding oil prices, measurement of the effect of Hurricane Katrina, CEO thoughts on the upcoming change in leadership at the Federal Reserve, and opinions regarding how the US should address Chinese imports.

Oil Drops to Number Two Economic Concern; Rising Interest Rates Take Number One Spot

Last quarter, nearly 50 percent of CEOs ranked the cost of oil and gas as their number one economic concern. The drop in oil prices has registered with CEOs and this quarter, about one-fifth of CEOs rank it as number one, on course with sentiments from the Q2 survey earlier this year.

Of greatest concern to CEOs this quarter are rising interest rates and the rising deficit. More than a quarter of CEOs identified interest rates as their number one economic concern, up from just 18 percent last quarter, while concerns over the rising deficit saw an increase of seven percent, from 11 to 18 percent. However, nearly half CEOs expect the change in leadership at the Federal Reserve to have no effect on the business community.

Impact of Hurricane Katrina

Last quarter, the TEC Confidence Index was conducted the week following the landfall of Hurricane Katrina. With reports of a flooded Louisiana and skyrocketing oil prices, CEOs feared the worst for the economy. Three months later, as oil prices settle and the impact of the natural disaster plays out, most CEOs note that the hurricane had little effect on business. Six percent of CEOs said that the hurricane had a strong negative impact on their business, while nearly 40 percent said it registered a mild negative impact. Nearly half of those surveyed noted the hurricane had no impact on business, while 10 percent experienced a mild positive effect on their businesses.

Hiring

Even though a majority of chief executives see economic conditions in 12 months remaining about the same as they are now, they do not expect to slow hiring plans. More than 60 percent of those surveyed expect to increase payrolls over the next twelve months, while only five percent will decrease payrolls.

Of those planning to hire, one-third will do so steadily throughout 2006, another 30 percent will increase employee numbers in the first half of the new year.

Making More Sales and Profits

Up from 77 percent last quarter, more than 80 percent of CEOs say they will see an increase in revenues over the next 12 months. To counter rising costs, more than half of CEOs will increase prices over the next year, and two-thirds expect increased profits.

Number One Business Concern

Again, CEOs rank staffing as their number one business concern. Nearly one-third find hiring and retaining quality employees to be their most pressing issue. Second on the list is the cost of business, including raw materials, oil prices and health insurance.

CEOs Support Policies Limiting Chinese Trade

CEO opinions regarding the management of trade policies with China ranged from protectionism to a hands-off approach to trade management. Nearly one half of chief executives support some form of trade limitations for Chinese goods; 19 percent favor limiting imports on Chinese goods in all industries; while 25 percent support limitations in only certain industries. Thirty-eight percent said that there should be no limitations on importing Chinese goods.

Holiday Cheer

This holiday season, more than one-quarter of CEOs will share more wealth, offering a larger holiday bonus this year than last. Nearly half will provide a gift or bonus similar to that given last year, while 13 percent offer no holiday bonus or gift.

New Wave in Software; Will Google vs. Microsoft Impact Business

Google's increased profile in the software industry has generated a highly-publicized challenge to Microsoft's industry dominance. More than one-third of those surveyed believe that the battle between Google and Microsoft will have a small positive impact on their business, while 43 percent do not think it will affect business and nearly one-fifth indicated they do not understand how the increased competition in the software field will impact their businesses.

TEC Confidence Index Components

                  Q3 2004  Q4 2004  Q1 2005  Q2 2005  Q3 2005 Q4 2005
----------------- -------- -------- -------- -------- ------- --------
Current Economic
 Conditions           159      160      158      136     124      115
----------------- -------- -------- -------- -------- ------- --------
Expected Economic
 Conditions           147      151      144      126      91      108
----------------- -------- -------- -------- -------- ------- --------
Expected Change
 in Employment        153      159      158      153     154      156
----------------- -------- -------- -------- -------- ------- --------
Planned Fixed
 Investment           148      149      145      142     139      139
----------------- -------- -------- -------- -------- ------- --------
Expected Revenue
 Growth               179      179      179      173     172      177
----------------- -------- -------- -------- -------- ------- --------
Expected Profit
 Growth               165      165      161      158     154      159
----------------- -------- -------- -------- -------- ------- --------

About the TEC Confidence Index

U.S. small and mid-sized businesses represent the most vital component of the nation's economy. This sector creates 75 percent of all new jobs and generates 50 percent of all national revenue. The opinions of these business leaders provide a clear snapshot of current economic, market, and industry trends and demonstrate their plans for growth over the next 12 months. These insights provide a leading indicator for employment, capital expenditure, sales and revenue trends.

The Q4 2005 TEC Confidence Index is a compilation of responses from 1,658 CEOs of small- to mid-sized companies, surveyed Nov. 17-23, with a margin of error of two percentage points. The TEC Confidence Index is the only comprehensive report of their opinions and projections.

About TEC International

TEC International, the world's largest CEO membership organization, enables companies to solve business problems, achieve better results and outperform the competition. Since 1957, only TEC members have benefited from a comprehensive suite of services that includes peer-group sessions, one-to-one executive coaching, experts on a full range of business subjects, a proprietary best practices library, and the collective experience 11,000 business leaders. TEC-member companies grow, on average, at a rate two times faster than they did prior to joining. For more information, visit www.teconline.com or call 800-274-2367.