Business Optimism on the Decline Among CEOs

High energy prices, a lack of pricing power and a steady rise in interest rates have taken a toll on business optimism among the chief executives of large multinational companies, according to a survey released on Thursday.

Less than 15 percent of 71 CEOs polled by the Business Council (search) and the Conference Board (search) expect business conditions in the United States to improve over the next six months, down from almost 40 percent in a February survey.

Only 27 percent expect improvements to continue in their industries, down from 43.2 percent in February.

The poll was conducted in September in the aftermath of Hurricane Katrina (search) and prior to Hurricane Rita, so the results do not reflect the full impact of the powerful storms, the Business Council said.

Despite the dour outlook, the CEOs were not ready to alter the profit outlook or forecasts for capital spending, according to the survey.

In fact, General Electric Co. (GE), whose products range from airplane engines to medical devices and media, forecast quarterly earnings at the high end of Wall Street estimates, and its chief executive said the U.S. economy is "still pretty darn good."

Clay Jones, chief executive of communications equipment and jet component manufacturer Rockwell Collins Inc. (COL), told Reuters at a Business Council meeting here that a lot of warning signs and risks were causing people to pause.

"That not withstanding, I think it's remarkable that the economy continues to percolate along despite a war, despite deficits, despite oil prices and despite hurricanes," he said. "That would suggest there is some strength that is residually underlying the economy that I think we ought to take some optimism from."

Nearly two-thirds of the CEOs surveyed expect the federal funds rate — the rate banks charge each other on overnight loans — to be at or above 4 percent by the end of 2006. At its last policy meeting two weeks ago, the Federal Reserve raised the fed funds rate by a quarter percentage point to 3.75 percent. It was the 11th straight increase in a series of hikes that started in mid-2004, when the rate stood at 1 percent, its lowest level since 1958.

While executives are comfortable with the Fed's policy toward higher interest rates, they are starting to see some dampening effect on the economy from rate increases.

Richard Davidson, chief executive of railroad operator Union Pacific Corp.(UNP), said his primary concern for the economy was the impact of steadily higher rates.

"If they keep jacking these interest rates up, that could put a damper on the economy," he said.

The impact on the economy of Katrina and Rita is already being reflected in jobless claims figures.

Unadjusted for seasonal factors, jobless claims linked to the two hurricanes totaled 74,000 last week, up from 70,000 in the prior week, according to the U.S. Labor Department. The running total of claims due to the twin storms now stands at 363,000, although economists caution that the data have been badly distorted.

The CEOs do not expect any increase in hiring. A quarter of the companies surveyed said they are having trouble finding workers.

Concerns about a lack of pricing power have mounted, the survey showed. Nearly a third of the CEOs surveyed expect their pricing power to "decline somewhat," up from 20 percent in February.

The pessimistic outlook among CEOs is not limited to the United States. Business optimism in all geographic regions, including China, was off from February. The survey indicated that nearly two-thirds of respondents expect global growth to be mostly unchanged in 2006 from this year, up from 58 percent in February.

The CEOs felt the best investment opportunities were in the United States. China ranked second, with 25 percent of those polled saying they were making a majority of their investments there. Three companies chose India as a primary investment locale.

Health care costs and security/terrorism still ranked as the top two policy challenges, little changed from February, the survey showed.

More than 76.5 percent of respondents said the requirements of the Sarbanes-Oxley Act (search) were excessive. The act was aimed at tightening corporate governance and requires CEOs to certify their companies' financial statements.