Deficits are cause for concern

Chief Executive, The, March, 2005

CONCERNED ABOUT the nation's yawning budget and trade deficits and the costs in time and money to comply with the Sarbanes-Oxley Act, chief executives are tempered in their outlook on the U.S. economy. At the same time, they say, the devaluation of the dollar has had little, if any, impact on their businesses.

The composite CEO Confidence Index dropped 6.4 points in February, to 163.5 (see chart, below left). It was the second consecutive month of decline, although the index remained high in comparison with the benchmark level of 100 established at the inception of the monthly survey in October 2002.

Each of the component indices also declined, with the fall-offs ranging from 4.4 points in Investment Confidence (now 138.0) to 9.3 points in Employment Confidence (172.9). Continuing a recent trend, CEOs remained significantly more confident about the present than the near future, one-quarter ahead, suggesting that overall confidence may slip even further.

The burden of increased government regulation weighs heavily on many CEOs minds, judging from written comments submitted with the 518 responses to the February survey. David J. Moore, chairman and CEO of 24/7 Real Media, a marketing and technology firm based in New York, described Sarbanes-Oxley as "crippling to smaller companies, where the risk of fraud is not as great to shareholders" as it is at large corporations.

The weakening of the dollar, believed by some economic and political leaders to be a stimulus for American business, has done little to allay CEOs' concerns. In a bonus question about how the dollar's decline has impacted their businesses in various ways, including hiring, sales growth, the expected cost of goods sold and expected profits, CEOs overwhelmingly said it had no effect at all (see below right).

Some chief executives tied the dollar's devaluation to the mounting deficits in Washington. "The weakness of the dollar versus other currencies will not be reversed until the world currency markets become convinced that the present administration is truly committed to reversing the U.S.'s huge current account and fiscal budget deficits," said Ron Samuel, president of Underwood Asset Management in Chicago.

RELATED ARTICLE: THE NUMBERS

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U.S. $ Exchange Rate

How has the dollar's recent devaluation affected your company?

                    Positive  No Affect  Negative

Hiring/Jobs         14.1%     77.0%       8.9%
Sales Growth        31.7%     57.9%      10.5%
Cost of Goods Sold  11.3%     57.0%      31.7%
Corporate Profit    23.6%     44.8%      31.6%

Note: Table made from bar graph.