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The confidence gap: the growing difference between current and future confidence and what it means.

CEO Confidence has been growing strongly since it's low of 89.4 in April 2003. It now stands at 170.1, only 6.3 points off it's highest mark ever. CEOs have become increasingly optimistic about hiring and with that the unemployment rate has fallen from 6.4% in June of 2003 to 5.2% in January of 2005. The Dow Jones has seen a healthy rebound and risen over 38% from March 2003. The CEO Index data looks strong, all indicators were up this month. Among this tide of confidence and increased productivity and efficiency, an alarming trend is developing.

This month we have analyzed the growing gap between Future CEO Confidence and Current CEO Confidence. Tracking it all the way back to their parity level in October 2002 we notice two key trends: CEOs up until December 2003 were more confident in the future and therefore anticipated growth. Since December 2003, we have seen a dramatic increase in the divide, as CEOs have become very confident in current conditions but future confidence has lagged increasingly behind. To be fair, October 2002 probably was not a month when current confidence was equal to future confidence. For that reason, it may be true that a healthy level of difference between the two may be something greater than zero. Nevertheless, it is unlikely that the true difference spans 40 points, and if we expect that difference is reaching its maximum point, we should have a few expectations on what CEO Confidence will look like over the next few months and subsequently what we might see in the market.

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The first thing to realize is that CEO Confidence is reaching a high point. Because all confidence indices (Consumer Confidence and Consumer Sentiment) are scaled, they can only get so high. CEO Confidence has a ceiling of 255 and that would require everyone of our 500-600 CEOs to opine that everything is great and that they expect the market will experience rapid growth. Furthermore, reaching these super highs becomes more and more difficult as confidence gets higher. For this reason, we may reasonably expect that CEO Confidence will struggle immensely to surpass 200 and even break numbers like 190.

If we assume that to be true, and we expect the gap between current and future confidence to shrink, we are faced with one of two likely scenarios: either we will see CEO Confidence fall until current confidence and future confidence are more in line with each other or we will see that CEO Confidence holds or slightly edges forward driven largely by increases in future confidence. At this juncture, the reader is just as qualified at prognostication, but I would venture a few thoughts that might shape our outlook.

CEOs are an inherently optimistic group-they are the fuel of American capitalism and with that comes levels of optimism uncharacteristic of the population. For that reason, further increases in optimism should not be surprising. This will likely be driven by increases in future confidence. However, future confidence in our index is driven by future increases in the stock market, employment, or capital spending.

Unemployment is unlikely to change dramatically as we approach our economy's natural level of unemployment (see previous article on employment), and the market buoyed by some serious gains in the Dow is unlikely to sustain dramatic increases without analysts crying for an approaching bubble. That leaves capital spending, and with that we are left with the question of whether we expect that CEOs will use this time of increased labor productivity and cheap capital to make investments in technology, infrastructure, automation, and manufacturing. With the decline in the dollar we can also expect that relatively more of those capital expenditures will be domestic.

The gap between current and future confidence may be widening, but that isn't to say CEO Confidence is doomed. Strong increases in spending and a sustained but gradual growth in the Dow Jones may be on the horizon.

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 Apr04 May04 Jun04 Jul04 Aug04

CEO Index 158.3 172.8 169.5 177.4 169.7

Chief Executive Component Indices: On October, 2002, all indices were
set at 100
Current Confidence Index 161.3 183.0 181.5 195.2 186.9
Future Confidence Index 156.2 166.0 161.3 165.4 158.0
Business Condition Index 181.2 197.0 191.1 202.1 189.7
Investment Confidence Index 140.1 149.4 141.8 145.5 143.7
Employment Confidence Index 156.1 176.1 181.1 191.2 180.8

Assessment of Current Confidence Index
Business Conditions
Good 34.5% 44.6% 45.0% 52.2% 45.3%
Normal 51.8% 47.0% 45.3% 39.2% 46.4%
Bad 13.7% 8.4% 9.7% 8.6% 8.4%
Employment Conditions
Good 14.7% 22.0% 27.0% 31.8% 31.7%
Normal 50.2% 54.2% 52.9% 50.9% 50.0%
Bad 35.1% 23.7% 20.1% 17.3% 18.3%
Investment Conditions
Good 42.0% 50.0% 42.6% 50.6% 43.5%
Normal 46.8% 41.2% 45.4% 41.5% 46.3%
Bad 11.2% 8.8% 12.0% 8.0% 10.2%

Assessment of Future Confidence Index
Employment Conditions
Increase 56.4% 65.9% 64.9% 71.8% 59.7%
Stay the same 39.1% 31.1% 31.9% 25.4% 35.2%
Decrease 4.5% 3.0% 3.2% 2.8% 5.1%
Capital Spending
Increase 46.9% 52.9% 52.6% 45.8% 51.4%
Stay the same 46.0% 41.6% 38.2% 47.0% 41.5%
Decrease 7.1% 5.5% 9.2% 7.2% 7.1%
Economic Developments
Rapid growth 3.8% 6.8% 5.4% 9.6% 3.9%
Gradual growth 78.2% 81.4% 77.1% 78.0% 76.3%
No growth or decline 15.1% 10.8% 14.6% 10.5% 16.6%
Gradual decline 2.6% 1.0% 2.6% 1.4% 2.8%
Rapid decline 0.3% 0.0% 0.3% 0.5% 0.3%

 Sep04 Oct04 Nov04 Dec04 Jan05

CEO Index 159.7 159.4 162.3 171.8 169.9

Chief Executive Component Indices: On October, 2002, all indices were
set at 100
Current Confidence Index 173.5 173.2 177.3 189.6 191.5
Future Confidence Index 150.3 150.0 152.1 159.7 155.3
Business Condition Index 178.9 177.3 182.3 194.0 190.7
Investment Confidence Index 135.6 137.0 137.2 142.5 142.4
Employment Confidence Index 169.2 168.4 172.3 184.8 182.2

Assessment of Current Confidence Index
Business Conditions
Good 37.3% 38.3% 41.1% 46.4% 45.8%
Normal 52.2% 51.6% 50.3% 46.6% 47.5%
Bad 10.5% 10.1% 8.6% 7.1% 6.7%
Employment Conditions
Good 24.7% 24.2% 27.9% 34.3% 29.8%
Normal 55.6% 54.1% 54.0% 51.8% 57.8%
Bad 19.8% 21.7% 18.1% 13.9% 12.4%
Investment Conditions
Good 39.2% 37.3% 37.5% 42.6% 45.2%
Normal 46.0% 50.4% 46.7% 44.4% 46.2%
Bad 14.8% 12.3% 15.8% 13.0% 8.6%

Assessment of Future Confidence Index
Employment Conditions
Increase 52.8% 54.6% 54.3% 59.7% 59.7%
Stay the same 40.4% 38.0% 37.1% 34.3% 33.4%
Decrease 6.8% 7.4% 8.6% 6.0% 6.9%
Capital Spending
Increase 47.2% 47.4% 51.0% 53.0% 46.8%
Stay the same 43.2% 44.9% 41.2% 39.7% 44.9%
Decrease 9.6% 7.7% 7.7% 7.3% 8.2%
Economic Developments
Rapid growth 2.2% 1.4% 2.4% 1.3% 1.5%
Gradual growth 72.2% 70.8% 72.8% 84.1% 80.4%
No growth or decline 22.2% 23.2% 20.7% 13.5% 15.2%
Gradual decline 3.1% 4.4% 3.6% 1.1% 2.9%
Rapid decline 0.3% 0.3% 0.6% 0.0% 0.0%

 Feb04 Mar04

CEO Index 163.5 170.1

Chief Executive Component Indices: On October, 2002, all indices were
set at 100
Current Confidence Index 182.3 193.6
Future Confidence Index 150.8 154.2
Business Condition Index 184.5 192.9
Investment Confidence Index 138.0 144.3
Employment Confidence Index 172.9 178.1

Assessment of Current Confidence Index
Business Conditions
Good 41.5% 50.2%
Normal 51.2% 42.3%
Bad 7.3% 7.6%
Employment Conditions
Good 29.7% 33.9%
Normal 52.3% 51.5%
Bad 18.0% 14.6%
Investment Conditions
Good 39.4% 44.6%
Normal 49.6% 46.3%
Bad 11.0% 9.1%

Assessment of Future Confidence Index
Employment Conditions
Increase 52.4% 52.5%
Stay the same 39.8% 39.7%
Decrease 7.8% 7.7%
Capital Spending
Increase 47.0% 51.6%
Stay the same 44.3% 40.0%
Decrease 8.7% 8.4%
Economic Developments
Rapid growth 1.0% 1.9%
Gradual growth 76.4% 79.6%
No growth or decline 19.1% 15.7%
Gradual decline 3.5% 2.9%
Rapid decline 0.0% 0.0%


A monthly report from Chief Executive Magazine. [c] Copyright, 2005. All rights reserved. For more information go to www.chiefexecutive.net.

Chief Executive Magazine, 110 Summit Avenue, Montvale, NJ 07645/ (201) 930-5959. The CEO Index and associated logo are registered trademarks of Chief Executive Magazine. NOTICE: These data are provided with no guarantees or warranties of any kind. While Chief Executive strives to ensure the information provided is accurate it or any of its affiliates cannot be held responsible for mistakes or misinterpretations.
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Copyright 2005, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:The CEO Confidence Index Report; Chief executive officers
Publication:Chief Executive (U.S.)
Geographic Code:1USA
Date:Apr 1, 2005
Words:1634
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