Shell Shocked CEOs

Monday, September 08, 2003 | 12:33 PM

The economy continues to improve. Inventories are low, GDP and Productivity strong; Industrial metals are up. Money Supply is still strong. Even after a 150 basis point spike, interest rates remain at historically low levels.

What are CEOs doing in light of all these positives? The leaders of Corporate America are being unusually cautious. Executives are showing some limited signs of confidence – engaging in Capital Expenditure spending – but only been where strong ROI or ample cost savings can be shown. Despite this timidity, Business Week sees an “increased willingness of executives to bet on the future means not only stronger GDP growth and a rebound in capital spending, but also suggests the job markets should finally begin to turn around, perhaps by year end.”

We suspect Business Week may be overly optimistic. From our perspective, we simply do not see CEOs making very aggressive bets on the future, either with their own money, or with their firm’s capital. For every insider share buy, there have been 32 shares sold. That’s simply a terrible ratio. Combine that with a dearth of corporate hiring, and you have an economic recovery based more upon fiscal stimulus than a self-sustaining organic economic growth.

Yes, we are aware that employment statistics are lagging indicators. We understand the process well: When CEOs start feeling confident about their prospects, they wring maximum output from each employee, thereby improving productivity. They recall laid off workers, they authorize overtime, and hire temps. Once they’ve exhausted all these methods, only then do they hire new full time employees.

But there are lags, and then there are LAGS, and presently, we are more than 21 months past lagging: Since the recession ended in November 2001, we have continued to lose jobs rather than create them (see chart nearby). By our math, this job-loss recovery must stop, and reverse itself by no later than Q2 2004. Otherwise, the continued loss will weaken consumer confidence, hurt spending, and ultimately, derail the recovery. Unchecked, this will cause another recession.

Call it Bear fatigue: Our explanation is that CEOs have become “shell shocked” by the three-year bear market. The Bear has CEOs overly focused on making this quarter’s numbers, to the detriment of making future investments in their companies. At the end of recessions, bold corporate leadership gambles on a recovery, and starts hiring quality employees (if sometimes too soon). These new hires must beat their competitors. Today, we find CEOs afraid to hire and not have the recovery follow. Lacking bold vision, their timidity could very well become an ugly, self-fulfilling prophecy.

Chart of the Week (take 2)
Since the recession ended in Nov. 2001, 1.1 million jobs have disappeared; There has never been five consecutive months of job loss outside a recession; August was the seventh such month.

Payroll Job Growth during Recoveries.gif
Source: New York Federal Reserve
In normal recoveries, the economy should have over 5 to 7 million jobs by this point, rather than losing 1.1 million jobs.

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