Chief executive officers anticipate sales slowing and capital expenditures decreasing over the next six months, according to a recent survey of CEOs, suggesting treasury departments will continue to be pressured to return capital to shareholders rather than funding business growth.
For the third quarter in a row, CEOs expressed increasing caution about U.S. economic prospects in the near-term and indicated they are moderating their plans for capital expenditures, according to the Business Roundtable’s fourth quarter 2015 CEO Economic Outlook Survey.
The Business Roundtable’s CEO Economic Outlook Index, providing a composite of CEO projections for sales and plans for capital spending and hiring in the first six months of 2016, fell to 67.5 in the fourth quarter from 74.1 in the third. Capital spending took the biggest hit, plummeting nearly 8 points in the fourth quarter survey compared to a much more modest 2.4 points in the third quarter’s.
The 140 survey respondents’ expectation of sales decreased by 3.2 points, and the CEOs anticipate GDP growth to come in at 2.4 percent, the same as the previous quarter.
“Lower expectations for sales and investment reflect CEOs’ ongoing caution about the near-term prospects for U.S. economic growth,” said Randall Stephenson, chairman of Business Roundtable, and chairman and CEO of AT&T Inc. in a statement.
Kevin Ruiz, principal at Treasury Strategies, said any number of reasons may be prompting that caution, but the underlying factor tends to be uncertainty. For example, recent comments by Federal Reserve Chairman Janet Yellen indicate the U.S. central bank will likely raise short-term rates at its next meeting Dec. 15 and 16, moving in the opposite direction of the European Central Bank, which today lowered its deposit rate by 10 basis points, to -0.3 percent.
“One of the big challenges today is the changing interest-rate environment, with the US, Europe and Japan all moving in different directions. It’s not a consistent message, and that type of uncertainty causes companies to retrench,” Mr. Ruiz said.
Lower capex spending and declining sales exacerbate companies’ dilemma about what to do with their excess cash. The issue has come up at recent treasurer peer group meetings organized by the Neu Group, both in formal sessions as well as off-line discussions among members, especially as valuations of potential acquisition targets continue to soar. For those turning away from M&A, the next best solution appears to be returning cash to shareholders. Share repurchases still hold sway among member firms over dividend payouts, given global volatility and the risk this portends for a long-term claim on cash.