China’s Financial Data Contributes to Decline in Economic Confidence of U.S. CEOs
The YPO Global Pulse Index of CEO economic sentiment for the United States continued its steady fall with a decline of 2.9 points to a less optimistic 59.9 in the third quarter.
This is the third consecutive decline after reaching a peak of 65.0 in January. Fears about the extent of the slowdown in the Chinese economy, its impact on developing countries in Asia, the drop in commodity prices, and the ongoing debate about the timing of the Fed’s first rate hike, are taking a toll. U.S. exports are expected to decline by five percent this year in response to the 15-percent increase in the value of the dollar over the past 12 months. The dollar’s strength appears to be a consequence of global uncertainty, while the Federal Reserve is poised to raise rates along with central banks around the globe. As the dollar rises, U.S. goods become more expensive for foreigners to purchase leading to a decline in exports.
China continues to struggle as it transforms from an industrial–based economy to a consumer-driven model. GDP growth in China has slowed markedly from a double-digit pace a few years ago, with any further growth expected to slow. The concern about China is accentuated because many economists question the validity of the reported data and wonder if Chinese GDP growth could be slowing even more sharply than expected. Global angst about China has seen stock markets around the globe fluctuate.
“The problem is that growth is not uniformly distributed across all sectors of the economy,” said Sunny Vanderbeck, managing partner at Satori Capital and a member of the YPO North Texas Chapter. “Consumer spending and housing are relatively robust, but manufacturing and trade are contracting. So whether the economy is doing well, terrible, or somewhere in the middle depends upon whom you ask. What is happening in China is making everyone around the world nervous—and it should. The slowdown in the Chinese economy has a direct impact on developing countries in Asia and a drop in commodity prices.”
Globally, the index declined for the fifth consecutive quarter, dropping 2.8 points in October to 58.1, which appears to be consistent with moderate growth in the quarters ahead. While each of the previous declines was modest, the October drop was more pronounced as concerns about slower growth in China, falling commodity prices, jittery stock markets around the globe, and an increase in interest rates by the Federal Reserve combined to make YPO members nervous. While confidence fell in every region around the world, the most pronounced drop was in Asia.
U.S. CEOs are decidedly less optimistic compared to six months ago. Twenty-six percent reported that conditions have worsened, compared to 18 percent in July. This erosion of confidence was most evident at firms in the production industry, which have been hit hard by the drop in oil prices and the decline in exports. Because of their exposure to overseas developments, large firms were far more affected in the past six months than their medium and small counterparts.
Global uncertainty will continue to erode U.S. CEOs’ confidence in the near future. When looking ahead six months, 35 percent of U.S. survey respondents thought the economy would improve, compared to 47 percent in July. Nineteen percent of respondents thought economic conditions would deteriorate in the next six months; 12 percent thought the same in July.