HAROLD (TERRY) MCGRAW III: Okay, thank you everybody for joining us, and good afternoon to you. I'm Terry McGraw, and I'm chairman of the Business Roundtable, and I'm chairman and CEO of McGraw-Hill Companies.
As a way of background, the members of the Business Roundtable, our chief executive officers of the nation's leading 160 companies, and collectively, we represent over 10 million employees and $4.5 trillion in annual revenues.
Today what we are doing is announcing the results of our First Quarter 2007 CEO Economic Outlook Survey. And this reflects our companies' outlooks for economic growth over the next six months. And we do this every quarter, and again with a six-month outlook.
This survey was conducted from February 8th through February 22nd, and was completed by 113 of the Business Roundtable's CEOs. The survey shows that CEOs are maintaining their view of a stable economy over the next six months, predicting an environment that is generally favorable for business growth. The CEOs' projections for sales, capital spending, and employment all reflect a steady economy with no significant acceleration or slowing over the next six months.
Here are some of the specific results, and you can find a chart comparing these results with previous quarters, and you can find it on our website. And let me give that to you. It is www.businessroundtable.org/ceosurvey. That is, www.businessroundtable.org/ceosurvey.
On sales, we saw a modest increase over the last quarter's survey. Seventy-three percent of our companies anticipate sales will increase in the next six months. Twelve percent expect sales to remain about the same, and only 15 percent project that sales will actually decline. On capital spending, more CEOs plan to increase their capital spending than last quarter. Forty-four percent of the companies are projecting higher spending in the next six months. Only 39 percent expected an increase in the last survey. Forty-seven percent are expecting spending to remain about the same. And only 9 percent are projecting an actual decline.
Employment projections were very similar to those in our last survey. Although the number of companies hiring dropped by 4 percentage points, that 4 percent shifted to the category of maintaining rather than decreasing employment. So one-third, 33 percent, of the companies predict they will add jobs in the next six months. Forty-five percent expect employment to remain steady, and 21 percent project lower employment.
And their projections for the overall economic growth – and this would be a projection now for the full year 2007 – CEOs are assuming that the U.S. GDP growth will be 2.9 percent for 2007. Last quarter, that number had been 2.8, so a slight increase from that standpoint.
These results have pushed the Business Roundtable CEO Economic Outlook Index to 84.9, a slight increase from the 81.9 in the fourth quarter of 2006. And just as a reminder, you know, ours is a diffusion index, and it's centered on 50. So any figure about 50 is about expansion, and anything below 50 is contraction. Now, the index remains well above the 50-to-70 range that we saw in the late 2002, early 2003 as the economy recovered from the last recession.
So, again, these results show that America's CEOs are maintaining their generally favorable view of the economy, projecting a stable employment picture, and modest increases in sales and capital spending over the next six months. We feel that this survey is an important forward-looking indicator of future economic activity, and given the tremendous volatility in data points, it is important to have a view that reflects business plans moving forward.
Just as in the past week that we have seen spikes in gas prices, the largest one-day stock market drop since 2001 – that was on February 27th – a precipitous drop in the Shanghai composite index, a durable-orders plunge, a sharp downward revision to GDP, and an uptick in inflation – given these ups and downs, those watching the economy will be interested to know that we continue to see business following a steady-as-she-goes mentality towards the economy.
With that, I'll hold it there, and I'd be happy to take any questions or comments that you may have.
Nell Henderson, The Washington Post: Hi, Mr. McGraw. Thanks for your time. And I have just got to ask at the outset, you just mentioned, you know, the spike in gas prices, the decline in stock prices, the GDP revision, and the hotter inflation number. Has your view changed since the survey was completed on the 22nd?
MR. MCGRAW: No, Nell. It really hasn't. I mean those are all, you know, significant events and the like, but, no, I think in terms of the outlook for the next six months, the CEO feel very confident in the assessment that they have made on that. And I think that you can take a look at any one of those and break it down a bit. But, no, in terms of projections, at this point, the CEOs feel quite comfortable that we have a solid economy for the next six months in terms of which to operate.
Henderson: Great, thanks.
MR. MCGRAW: Thanks, Nell.
Scott Malone, Reuters: I mean, just to follow up on that, obviously, given the drop offs we have seen – (inaudible) – the study was completed, I guess, two questions, one would be, you know, of all of the risk factors that we have seen kind of flare up over the last week, what would you be most worried about. And if you’re not worried, Wall Street really is. What have they got wrong?
MR. MCGRAW: Okay, Scott – well, you know, obviously in terms of any economic pictures, there are always clouds and you have to watch those very carefully. Certainly one is consumer spending. Consumer spending continues at a rapid pace. Cost-of-living increases to the individual, whether it be gas pumps, credit cards, mortgages, whatever – you know, are certainly factors. And the fact the savings rate is negative is also not a good situation. So you have got to stretch consumer, and the consumer makes up two-thirds of the economy. So, you know, you have to weigh that one very carefully.
I think another potential cloud out there is inflation. We all know that the core rate is at 2.3. But we also saw in January, healthcare costs move up to 0.8 percent. We saw labor costs also increasing, and so we want to see what that effect has on the inflation, and for sure, the Federal Reserve is watching that obviously very carefully.
Some of the plus signs in all of that, I would add, Scott, is that the projected deficit for this year is now 1.8 percent of GDP, and that is half of what it was in 2004. So I think there is – you know, there are always some clouds that exist there, but you have to watch them all very carefully. But the CEOs, this is a sentiment approach that they are taking. How do they feel about their sales, their capital spending, their employment picture, and in the aggregate, it's very solid, very steady.
Barbara Hagenbaugh, USA Today: Hi. Good afternoon
MR. MCGRAW: Hi, Barbara.
Hagenbaugh: Regarding the capital spending plans, you mentioned the durable-goods decline in January, which was especially steep. Do you think that that was kind of the trough for capital spending, or how would you characterize what is happening with capital spending?
MR. MCGRAW: Well, I think that, you know, again, in terms of this sentimentality that the CEOs are expressing is that the economy – you know, they are less concerned about a downturn. They are seeing at this part of the cycle that the growth, you know, is more solid, more steady, and therefore I think they have more confidence, you know, that spending at this point is in order. Whenever you see concerns about the overall economy or any kind of projections going out, you know, one of the things you want to look at first is, one, consumer spending, and secondly, business spending. And I think the fact that – you know, capital spending is on the rise should be an encouragement from a business standpoint.
Hagenbaugh: Thank you.
MR. MCGRAW: Thanks, Barbara.
Michael Burnham, Greenwire: Over the next six months, what are the CEOs predicting for the impacts of energy prices on their operations, and are they worried that the recent gasoline price rise will prove problematic as we head into the summer driving season?
MR. MCGRAW: Yeah, hi, Mike. You know, again, we didn't in particular get an assessment on how people individually feel about gas prices or energy costs overall. I can give you my impression. It's obviously a wildcard. Currently we think that oil prices in the $61, $62 range is probably where it is going to remain, give or take. We don't see an appreciable decline on that, and I certainly hope we don't have a particularly high increase on that one. So there is nothing in the system right now that would suggest something, but again, energy is so event-driven that any catastrophic event or anything like that could certainly change people's sentiments on that one.
But at this point, you know, looking at roughly $61, $62 a barrel, I think that gives way to the steady, solid assessment that CEOs are having on the economy.
Burnham: Thank you.
MR. MCGRAW: Thanks
Nell Henderson, The Washington Post : Sorry, I hope I am not taking too many turns, but I just can't help but want to ask you, sir, what do you think about Alan Greenspan's comment that there is about a 30 percent chance of a recession this year?
MR. MCGRAW: Yeah, well, first of all, Alan Greenspan, as I see, is one of the most respected economists, and whenever Alan Greenspan speaks, people listen. I think all economists, as we know, try and come up with a – you know, their core position of what they think in terms of the highest probability of what is going to happen. And then they come up with various scenarios that could go wrong with that, and they all put a probability factor to that.
I think most of the chief economists that I know, and some of our own – David Wyss at Standard & Poor's – you know, we are looking at this as, you know, there is probably a 20 percent, 25 percent probability factor of a recession that they have in their scenarios. But they aren't anticipating that. And certainly the sentiment and the data from the CEO survey do not suggest, you know, any likelihood of a recession. So, again, I think that, you know, that's fine that Greenspan has that scenario, but it is a low probability relative to the probably that we’re going to have a more solid steady environment.
Henderson: Thanks.
MR. MCGRAW: You bet.
Jeannine Aversa, The Associated Press: Hi, there. I came in a bit late. I couldn't hear well at the beginning, so I may be asking a question that has been asked before.
MR. MCGRAW: No problem, Jeannine.
Aversa: In terms of the outlook of executive seems to be fairly good, I know that this survey was taken after the stock market nosedive from last week.
MR. MCGRAW: Correct.
Aversa: Has your outlook changed? Do you think that –
MR. MCGRAW: No, Jeannine, it really hasn't. You know, the assessment that the CEOs took was for an outlook for six months going out. And in terms of their expectations of sales, their expectations for capital spending, and their expectations for employment, there is no change in their feeling that the six months ahead are solid and steady. They are projecting 2.9-percent GDP growth for the year, which is up 1 percent from the survey taken in the fourth quarter. And so, you know, I think that there is a – a stronger, a more positive outlook for the economy, and I think that is in keeping.
Now, again, event risk can change those kinds of things, but that is not anticipated, and the CEOs of the Business Roundtable are going to be spending a little bit more in terms of capital spending, and they see increased sales over this period.
Aversa: Thank you.
MR. MCGRAW: You bet.
Barbara Hagenbaugh, USA Today
MR. MCGRAW: No – : Hi, sorry to bug you again.
Hagenbaugh: You had said that you expect oil prices to be in the $61-to-$62-a-barrel range.
MR. MCGRAW: Right.
Hagenbaugh: Have we gotten used to oil prices being in that range? I mean, a couple of years ago, that would have caused a lot of calamity, but are we at the point where that has kind of been the new norm and businesses can operate with oil prices at that level?
MR. MCGRAW: Well, Barbara, it certainly is for right now. And again, with changes taking place worldwide, that could clearly change, and then we would have to all adapt to that, whether it's lower or higher on that one. But that is our projection at this point. And when you start thinking about the excess liquidity in the marketplace that exists, you know, you have got to look about where it is coming from. You have got about 300 billion coming from the OPEC countries. You have got about 200 billion coming from China and Japan each, and you have got about 100 billion from Canada and Russia. And that is going to continue for some time. And that is in keeping with more of $61-$62 barrel. Now, if you had projections either way, higher or lower, that would influence obviously that liquidity.
Diana Gregg, BNA: Hi, yes. I know you don't ask in the survey about the Fed outlook, but I know you did mention in your comments that the core inflation and the higher medical and labor costs were something the Fed was going to be watching. So do you think that CEOs are less likely to – now are thinking that the Fed is less likely to cut rates any time than they were maybe a quarter ago?
MR. MCGRAW: Well, no, I think that the Federal Reserve is obviously watching the core inflation number, and any kind of influences that could affect that. They are also looking at unemployment hard, and that is probably a more important factor that the Fed watches. But the CEOs of the Roundtable through this survey don't reflect on interest rates moves, and the like.
I can give you my personal opinion, and that is that I think that the Fed will probably start cutting rates by sometime this summer, and we're forecasting that we'll see probably about a 4.5 percent rate by the end of the year. That is according to David Wyss, chief economist at Standard & Poor's. And so, you know, I do think that the next move by the Fed is to cut, but, again, that is my – that is not an assessment of the Business Roundtable.
Bryan Chappelle, CD Publications: Yes, thank you. As far as the projections on GDP growth go, how much of a concern is the housing market going forward from here as the correction obviously is still, you know, in its bad days with delinquency growing, with inventory still very high? I mean, how much of a wrench can that throw into the projections?
MR. MCGRAW: Right, well, again – thank you, Bryan, but, again, that wasn't a part of the survey and the assessment. And, again, I can give you from my own standpoint the view that the housing slump essentially has bottomed out at this point. I think a lot of the commentary about the sub-prime market and some of the secondary mortgage area is way overblown, that it is actually not as much of a concern. But in terms of taking everything into account, in terms of how these CEOs are managing their own individual businesses, and factoring what other things that they take into account, they are thinking that GDP for 2007 would be 2.9 percent, and, again, that is 1 percent higher than the survey in the fourth quarter.