A fragile recovery: the economy may be able to keep growing, but CEOs have big worries—and they aren't convinced that jobs will rebound

Chief Executive, The, April, 2004 by Joan Warner

The U.S. economy is growing, interest rates are at rock bottom, and inflation is quiescent. Massive layoffs are mostly a bitter memory. Companies are seeing their sales improve and profits, too. It looks and feels like a recovery.

But does this recovery have legs? And, if so, what will it look like six months from now? Those are burning political questions that could decide the outcome of November's presidential election.

Having scant respect for either politicians or economists who make rash predictions, we at Chief Executive posed the question to the people who make decisions about the future of the economy, namely our readers.

Nearly 65 percent of the 226 executives responding to our CEO Confidence Index said "yes," the economy might continue to expand after the election and into 2005 and beyond.

But that affirmative answer was followed by a resounding "if." From monetary policy to a shifting regulatory climate to global competition, CEOs see many risks that could derail the economic upswing. Their current investment and hiring plans reflect considerable wariness. Very few predict a robust recovery, and for the second month in a row, their overall confidence declined. (See charts, page 28.) "They're all uneasy," says American International Group CEO Hank Greenberg. "They're all being cautious, and you can't blame them."

The uncertainty is apparent across industries and in companies of every size. Greenberg expects to keep capital spending at his global insurance giant level for the time being, and nearly half of the survey respondents said their companies would do the same. And while 52 percent expect payrolls to increase over the next quarter, none expect job growth to explode any time soon. That's almost certainly bad news for those who predict massive job growth by Election Day.

Behind the CEO reticence is a sense that the U.S. economy is still undergoing deep structural changes, not just cyclical ones. All through the last recession, productivity kept creeping up--the result of careful cost management by companies and improvements in technology. The downside of productivity gains, however, is that they keep a lid on employment.

At the same time, globalization means that manufacturing and, increasingly, service jobs continue to move overseas to lower-wage countries. As Intel CEO Craig Barrett and others are arguing, the U.S. has become a high-cost place with a relatively slow growth rate compared with India or China. Eventually, executives think, domestic job growth will pick up, but not necessarily in traditional ways. "Job creation may mean different kinds of job creation," says Joe Wright, CEO of Wilton, Conn.-based PanAmSat, a commercial satellite services provider. "We won't be hiring someone to go on the factory floor. We're following a different model."

Naturally, executives are keeping a close eye on the classic engines of growth, namely fiscal and monetary policy. To get this recovery going, the Federal Reserve reduced interest rates seven times in 2001, then made four more cuts after 9/11. As a result, short-term borrowing costs are at a 40-year low. That, along with $36 billion worth of tax rebates, has put more money into the pockets of consumers, who account for more than two-thirds of gross domestic product. But these stimulative conditions can't last forever. Says Greenberg: "I'm concerned about this recovery's long-term viability because fiscal stimulus from tax cuts will run its course. And while there's no evidence of inflation right now, it's inevitable that interest rates will have to rise sooner or later."

That's not just because the Fed can't go any lower, but also because of the outsize budget deficits looming ahead. While recognizing that government spending on security measures at home and counterterrorism efforts abroad is a necessity, executives worry about the U.S.'s financial future. "The massive deficit spending and debt we are accumulating are going to come back and haunt us as a nation," declares J. Doug Pruitt, chairman and CEO of Sundt Construction in Tempe, Ariz. "We have got to get control of the budget, and fast."

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Lee Schuman, president of Majestic Distilling Company in Baltimore, agrees. "The huge deficits run by the Bush administration," he says, "are a ticking time bomb that must be dealt with in order to protect the long-term recovery."

In this context, even the weak dollar, which has helped fuel the expansion by boosting exports, is a double-edged sword. Many are concerned that foreign investors, who hold more than a third of U.S. Treasury bonds, will pull their money out of greenbacks and sink it into stronger euros. That would put further upward pressure on interest rates. In addition, a sinking currency can wreak havoc with corporate cash management. "The government thinks a weak dollar helps exports," complains Ron DeFeo, CEO of Terex, a $3.5-billion maker of construction equipment in Westport, Conn. "But there are big costs associated with 30 percent swings in currency value, and most large American companies are actually harmed. Business hates volatility."