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Business Roundtable Fourth Quarter 2007 CEO Economic Outlook Survey Media Conference Call Transcript

OPERATOR: Ladies and gentlemen, thank you for joining the Business Roundtable's briefing on the fourth quarter 2007 CEO Economic Outlook Survey. At this time all telephone participants are in a listen-only mode. Later, we will conduct a question-and-answer session, where you will be given the opportunity to ask questions about the CEO Economic Outlook Survey. If you should require assistance during the call, please press star then zero.

I will now be turning things over to our host, Mr. Terry McGraw, III, chairman of the Business Roundtable, and chairman, president and CEO of the McGraw-Hill Companies. Mr. McGraw.

TERRY MCGRAW: Thank you very much, Ryan, and good afternoon, everybody. And thank you for taking time from your busy schedules to join us. As Ryan was saying, this is the fourth quarter Business Roundtable CEO Economic Outlook Survey. And I am Terry McGraw, chairman of the roundtable and chairman and CEO of McGraw Hill Companies.

The members of the Business Roundtable for informative purposes are chief executive officers of the nation's leading 160 companies. Collectively, we represent over 10 million employees and $4.5 trillion in annual revenues. The Roundtable began its quarterly CEO economy outlook survey five years ago in the fall of 2002. Today we are announcing the results of our fourth quarter 2007 CEO Economic Outlook Survey, which reflects the outlook for the economic growth over the next six months for our member companies, and, again, for all surveys, it's always an outlook into the next six months in terms of a view on the horizon.

This survey was conducted between November 5th and November 20th, and was completed by 105 Business Roundtable CEOs. Now, despite the strong cross currents facing the U.S. economy, this quarter's CEO Economic Outlook Index remains steady with a subtle uptick predicted by the CEOs for the next six months. The survey also yielded slight increases in expectations in the three areas of sales, capital expenditures, and employment.

Specifically, the fourth quarter index rose slightly to 79.5, up from 77.4 in the third quarter. And in the fourth quarter of each year, we also ask our CEOs to rank the greatest cost pressure facing their business, and this year there was as significant shift. Healthcare and energy expenditures tied with 32 percent as the greatest cost pressures facing the roundtable's members' companies.

Okay, with that as an overview, let me give some specific results here. And you can find a chart comparing these results with previous quarters at www.businessroundtable.org/ceosurvey. That is www.businessroundtable.org/ceosurvey.

All right, in the three areas that we look at, sales, capital spending, and employment, let me begin with sales. We saw a modest increase over last quarter's survey. Seventy percent of the CEOs anticipate sales will increase in the next six months. Seventy percent expect sales to remain the same, and only 13 percent project that sales will decline.

On the capital-spending front, the CEO's expectations remained relatively level compared with last quarter. 35 percent of CEOs are projecting hire spending in the next six months. 51 percent are expecting spending to remain the same, and 14 percent are projecting a decline. So relatively good news, but one we want to watch very carefully. Overall, 86 percent of our CEOs still plan to increase their cap expending or at least maintain their current levels, and that is the good news.

Employment projections were very similar to those in our last survey. Thirty-three percent of our CEOs expect to add employees. Forty-five percent expect employment to remain steady, and 22 percent project lower employment – so roughly 80 percent to hold or increase employment. So, again, a very good picture and very much in keeping with the very attractive unemployment rate that we currently have.

In their projections for overall economic growth, the CEOs offered their first estimate of GDP growth in 2008 in this survey. On average, they are assuming that GDP growth of 2008 of 2.1 percent, and they are building that into their business plan.

Again, collectively, these results have produced a small uptick in the Business Roundtable CEO Economic Outlook Index, and, again, that is from 70 – up to 79.5 from 77.4 in the third-quarter survey. And I just reminding everybody that this is a diffusion index centered on 50 so any figure above 50 is expansion and anything below 50 is contraction.

And as I said last quarter, the index remains well above the 50- to 68-point range that we saw in the late 2002, early 2003, as the economy recovered from the last recession.

Now, let me share with you some findings from our annual question which asks our members to identify the greatest cost pressures facing their business. As I mentioned earlier, this year there was a tie for the top cost pressures. Both health care and energy costs were ranked the highest, each, again, cited by 32 percent of the CEOs.

This is a significant switch from last year. In fact, the concern over energy costs has doubled with 16 percent of the CEOs rating energy as their top cost pressure in 2006. Clearly, recent spikes in energy prices are of great concerns to the CEOs, and since just last quarter, oil prices have increased from $70 to $80 to nearly $100 a barrel and of course we are just under $90 now.

Of the remaining cost pressures, 17 percent of the CEOs identified material costs, obviously the commodity costs in building product. Ten percent list litigation. Five percent cited labor. And one percent cited capital costs as their top cost pressures. Overall, the results of today's survey show that America's CEOs are expecting the economy to continue in a pattern of softer growth. As was true last quarter, it is our belief that as long as consumers keep spending, and they have, and as long employment is steady, and it seems to be, the economy can continue to move ahead.

On a final note, the new survey does suggest that although credit market pressures have raised many concerns about the economy, the CEOs do not appear to be cutting back on their investment or their employment plan and do not foresee slower revenue growth. Simply put, steady as she goes seems to summarize the CEOs view of the U.S. economy.

Let me leave it with that. And, again, thank you for joining us on this call. And I'd be happy to take any questions that you might have.
OPERATOR: If you were on the phone and want to ask a question about the Roundtable's CEO Economic Outlook Survey, please press star then one. If you wish to remove yourself, please press the pound key. We request that you limit your questions to the CEO economic outlook survey. We will now take your questions. And we'll take the first question from the line of Barbara Hagenbaugh with USA Today. Please go ahead.

Q: Hi. Some of the CEOs, according to this survey, must have answered November 5th. So about a month – it's been about a month. Would you expect that the answers would have been different had they been taken perhaps in the last week? Would your opinion – has your opinion changed in the last month of the economy?
MR. MCGRAW: No. I think – thank you, Barbara, but, no, I don't think so. In fact, I think it would be very similar. And what we're seeing is obviously a housing recession that is impacting the economy. We have been in this housing recession for about 24 months, and it's costing the United States about a percentage point of growth. But in terms of looking at a spillover effect into the general economy, we're not seeing that.

We're watching obviously the consumer very carefully, and the consumer consumption behaviors don't suggest that kind of – you know, or a change in that kind of sentiment. And in anything, with the dollar down and exports a lot stronger, the trade deficit looks better. We're seeing good capital spending – not as strong as we would like it, but, you know, good capital spending, and therefore the employment picture, with the unemployment rate at 4.7, you know, things look pretty good. But, again, you have got a housing recession, you have higher energy costs and the like, and we have to watch what the effect of those are going to be on consumers

Q: Thank you.

MR. MCGRAW: Thanks.
OPERATOR: And our next question comes from the line of Scott Malone with Reuters. Please go ahead.

Q: Hi. I guess what struck me about – or the question that really struck me about this is – I mean, it seems, that, you know, the CEO has got a bit more bullish on the economy in the last quarter. What – what is it they are seeing out there that's, you know, changed their mood? I mean, you have had a couple of quarters of decline coming into this one.

MR. MCGRAW: Yeah, I think that in general, Scott, you know, people who keep waiting for shoes to drop, and you know, you do have a housing recession, and you do want to watch what – you know – I mean, if there could be any spillover effects, you know, from that, of which we have not really seen any on that one. And so I think people are – our CEOs are getting a little bit more comfortable that we are slowing down a little bit as an economy and that there aren't, you know, huge dark clouds out there. But, again, we have to pay attention to the consumer and consumer behavior patterns. But, you know, so far, I think, you know, people are feeling that the general economy is in pretty good shape and that our growth projections for this year and now for 2008 at 2.1, you know, is not robust, but it's certainly in keeping with this kind of sentiment.

Q: Thank you.

MR. MCGRAW: Thanks.

OPERATOR: And our next question comes from the line of Jeanine Aversa with the Associated Press. Please go ahead.

Q: Hi, there. My first question was just answered. If you would like to expand on that, which was, you know, why do you CEOs feel pretty good about their business prospects given all of the problems facing the economy. If you could elaborate a little bit more on that. And then secondly, a housekeeping question, on your GDP forecast, is that Q4 over Q4 – is an annual average?

MR. MCGRAW: That's an average, Jeanine. And again now, you know, you're talking about 160 of the largest leading companies in America. Most of these companies, you know, have strong global sales and therefore they are, you know, participating in a world economy. Clearly, you know, the growth rates that they are seeing for us are lower than are more traditional in the last several years of 3.5 percent rough growth on there. And so, therefore, we're a little bit slower. Interestingly, you know, we're all on about the same trading range as developed countries: Japan, the United States, Canada, and Europe are in that sort of 2 to 2.5 percent range.

World growth forecasted for this year is 4.9. And you've got the large developing countries growing at such a terrific pace, 11.5 percent for China, 9.5 percent for India. And therefore, you know, their outlook, these CEO outlooks are looking at a much broader opportunity. You know, it used to be, also, Jeanine that when people talked about slower economies or even recessionary environments and the like that if the United States got caught in that, that would have an effect on the rest of the world. Today, that is less so because the world is fast growing up and growing at a much better rate, the effect and the influence of one economy on a region or on the world is less so today. So I think that they're seeing a much broader view from a much broader horizon.

Q: Thank you.

OPERATOR: And as a reminder, if you do wish to ask a question, please press star, then one. And our next question will come from the line of Kelly Evans with the Wall Street Journal. Please go ahead.

Q: Hi, I have a couple of quick questions. The first is that I know in the September outlook survey, there was a special question about the credit crunch. Was there nothing of that sort this time?

MR. MCGRAW: No, we did not ask that question. We just asked this time what is the highest cost pressures that you see in your business. And again, health care has been a pretty steady response to all of that. The surprise this time was that, you know, energy. One would have thought that perhaps energy would have come up before, but just in terms of the third quarter survey to the fourth quarter survey, it doubled from 16 percent to 32 percent of CEOs saying that it was the greatest cost pressure.

Q: Thanks. And also in terms of CEOs' perspective on the year ahead, you mentioned that they have, you know, that they're very sensitive to what's going on with the global economy and not just the domestic economy. Do you think that there's any risk that a pull back in consumers in the U.S. economy may at this point be – that they may not be giving full weight to the ramifications of such a pull back on their companies or should they even deserve to give it weight?

MR. MCGRAW: Well, I think what you're hearing is, as a sentiment from the CEOs, that the 2.1 percent that they're forecasting for 2008 says that, essentially, the economy is going to behave much like it is behaving now and that it is not the robust growth for us that we would like, but it's going to slower, steadier growth. And from an environment standpoint, as long as you don't get shocks to the system that it's pretty much a straightforward environment for doing business. So I would say that from the outlook that a consumer could retrench, or something like that, they're just not seeing that in their sentiment for the next six months.

Q: Thanks and the last thing – with only 105 CEOs responding to the survey, is that typical in the number of responses that you usually get?

MR. MCGRAW: Yeah, it all depends. It's usually somewhere between 100 to 120.

Q: Okay, thank you.

MR. MCGRAW: Thanks a lot, Kelly.

OPERATOR: Our next question comes from the line of Steve Mathews with Bloomberg News. Please go ahead.

Q: Hi, Terry. I think I heard you say that there are no huge dark clouds out there. And I guess my question is, do you consider the credit turmoil and what's happening in credit markets to be a huge, dark cloud? It looks that way to a lot of people.

MR. MCGRAW: Yeah, Steve. Thanks for the question and let me clarify that. I think that, you know, when we were taking a look at this assessment and what does it mean and how are people feeling about things, especially as it relates to sales, capital spending, and employment that there isn't an overarching risk to their business, you know, at this point based in their sentiment. So you're absolutely right.

I mean, we don't know the effect of certain things that are coming about and what could influence consumers to do things differently and whatever, but it's not event-sensitive that way; it's an assessment of their business and what they think their business is going to be able to perform in the next six months. So I wouldn't read into it that people aren't concerned about the credit crunch or not concerned about energy prices or concerned about the housing recession. I think it just says that, taking it all in, they think, for their businesses, they are going to be in reasonably good shape for the next six months.

Q: Fair enough, thank you.

MR. MCGRAW: Thanks, Steve.

OPERATOR: If you wish to ask a question, please press star one. And our next question comes from the line of Matt Tobias with Modern Healthcare. Please go ahead.

Q: Hi, good afternoon and Terry, I know that you've addressed some of what I was going to ask. But I wanted to revisit the topic of healthcare as a cost pressure. It sounds to me like it's less of a surprise that healthcare is number one, but more of a surprise that it's sharing that spot with energy costs. Is that accurate?

MR. MCGRAW: Yeah, I think that is.

Q: Now, is there any indication that it's less – well, it's sharing the number one spot. I know it's still a number one concern, but is there any indication that maybe some of these CEOs are seeing less of a burden when it comes to healthcare costs? I'm not sure if I'm phrasing that question right, but what can we kind of look at –

MR. MCGRAW: No, and I would – and, Matt, I would take these as not combined, but mutually exclusive on that. Health care has been a steady concern, you know, at the CEOs Business Roundtable. And quite frankly, the roundtable has taken leadership positions in trying to push certain ideas and legislation to improve that. One of those, by the way, is the whole health IT area, electronic medical records.

We are disappointed because we know there's support on both sides of the aisle and we sure think that saving $165 billion in a year would be a good thing to do and we ought to pass that. But they aren't mutually exclusive. And I think that, you know, once you, you know, at some point, I thought that in the $70, $80 range, I thought that probably would have pushed the concerns up. And of course, it did not on that one. That was a little bit of a surprise. But now that you approach the $100 a barrel area, it obviously doubled in terms of its focus on cost.

Q: Gotcha. Thank you very much.

MR. MCGRAW: Thanks, Matt.

OPERATOR: And our next question comes from the line of Brian Hanson with Platts. Please go ahead.
Q: Hi. I was wondering if you had any comment on how the energy legislation that is currently pending on Capitol Hill might affect the CEO's beliefs, concerns about energy prices?

MR. MCGRAW: Yeah, and there's some very good pieces of this energy legislation. And my guess is, it's coming to the floor tomorrow, from the last I heard for a vote. There are some things in it that are very good. There are some things in it that are a little bit troubling.

Anything that increases production is a good thing. And therefore, we're pushing very aggressively for those things that can help support that. Secondly, you know, conservation – there's a big component in this legislation having to do with conservation. And without getting into details, I think that's just absolutely smart and spot-on. And we've got to be able to do more on that part.

Other than that, you know, we think that there is more work to be done on this legislation in terms of some of the financing capabilities associated with increasing the production. And therefore, net-net, we are not supporting passage of this legislation in this form. And we would like to see a little bit more work done in terms of thinking through how we increase production in a way that isn't penalizing in our companies.

Q: If I could just follow up, are there certain provisions in the bill, the CAFE standards, the renewable portfolio extended for electric utilities? Would you like to see those out of there, the tax package?

MR. MCGRAW: I think it's more in the latter, Brian. I think it's more in terms of the tax package and the effect that that would have on certain companies in terms of how they go about increasing production, that it's a bit punitive on that one. And therefore, we're not supporting it from that standpoint. But we need energy legislation and we're working very hard as an association to help support certain parts of it. We think there are good pieces to this and I really want to stress that, Brian. But we think net-net the bill needs more work.

Q: Thank you.

MR. MCGRAW: Thanks, Brian.

OPERATOR: And at this time, we have no further questions in queue.

MR. MCGRAW: Okay, well, again, thank you everybody for taking time to be with us. And given some of the things we've been talking about, it's encouraging to see a little bit of an upbeat report on the economy and the Business Roundtable looks forward to the first quarter and giving you even more, I hope.

Thank you all very much.

OPERATOR: This concludes the Business Roundtable's briefing on the fourth quarter 2007 CEO Economic Outlook Survey. A transcript of this call will be available later today. Please visit www.businessroudtable.org for more information.

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