As Optimism About the Economy Grows, CEOs Remain Skeptical
By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL
Does big business know something about the economy that economists have missed?
In recent weeks, the latter have grown increasingly optimistic about the economy's prospects, as evidence mounts that the nation's first recession in a decade appears to be ending. Citing strong gains in consumer spending and rising orders for durable goods, forecasters say the economy has entered a new growth phase and the only question now is whether it will be a strong one. The nation's most powerful economist, Federal Reserve Chairman Alan Greenspan, also sees a recovery on the horizon, albeit a subdued one (see related article).
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Yet, corporate executives are approaching the recent talk of recovery with a high degree of skepticism. At the start of its semiannual meeting late Wednesday in Boca Raton, Fla., the Business Council, a group of executives from the nation's largest corporations, reported that 75% of its members believe the U.S. remains in recession ; 77% said the economy isn't likely to grow much more this year than last year.
Ultimately, such pessimism could act as a natural restraint on the economy even as it picks up steam. "It is clear that member's firms are planning to take a very cautious stance with regard to hiring, to wage policy and to new investments," says John Lipsky, an economist at J.P. Morgan Chase who oversaw the survey.
That is already happening at Avery Dennison Corp., a Pasadena, Calif., company that makes labels and packaging materials. Philip Neal, the company's chief executive, said that while orders across a wide range of product lines have picked up in the past few weeks, he isn't ready to celebrate.
"We're not clapping our hands and jumping around the hallways," says Mr. Neal. "A few weeks of strength in orders certainly does not make a trend." He says he suspects the recent bounce that economists are seeing might be little more than a fleeting rebuilding of inventories that were slashed in the final months of 2001. He says he is going to push ahead with cost-cutting, follow through with layoff plans, and hold off on adding new capacity for another 12 months.
At Home Depot Inc., Chief Executive Bob Nardelli isn't much more upbeat. Even though he is opening 200 new stores, he doesn't even see a strong economy six months down the road. "I know everybody talks about a second-half recovery," he says, but "at least in my econometric model, I'm not getting it."
Contrast this pessimism with the position that Alan Blinder, a Princeton University economist and former Federal Reserve Board vice chairman, is taking. He spent a week in January at the World Economic Forum in New York making $10 and $25 bets with other economists that growth would surprise to the upside this year. He thinks there will be at least one three-month span this year in which the economy grows at an above-average 5% annual rate. When he presented his bullish scenario to top executives at a January corporate gabfest, he says he got a lot of blank stares.
The disconnect between CEOs and economists is a big concern because it suggests that one group is missing something. "Any time I hear people telling me that they're not seeing [the recovery] in the real world, it raises a lot of questions," says Richard Berner, chief U.S. economist at Morgan Stanley. "I have to do a little reality check."
Big-business executives do have a reputation for being overly optimistic when times are good and overly pessimistic when times are bad. Of course, the pessimism isn't universal. People running small businesses "see a different world out there," says William Dunkelberg, chief economist at the National Federation of Independent Business. In a January survey, the NFIB's index of small-business sentiment rose to its highest level in two years. And Mr. Dunkelberg argues that small-business executives might have a better perspective on the outlook because they are operating closer to the pulse of the economy than are their big-business counterparts.
There are some clear economic trends that are contributing to the pessimism at big businesses. Most notably, companies entered 2002 with a distinct inability to raise prices, prompting some economists to predict that the coming economic rebound could be a "profitless recovery."
Dan DiMicco, chief executive of Nucor Corp., a small steelmaker, has seen prices for flat-rolled steel fall 50% during the past three to five years. Because a wave of bankruptcies helped to reduce the supply of steel on the market, he is hoping to raise prices 15% in the next six months. But he says he has "no idea" whether he will be able to hold those increases.
This has important consequences for how a recovery is likely to unfold. With profits stabilizing but still under pressure from a lack of pricing power, executives are reluctant to back away from the cost-cutting plans that dominated their year in 2001.
"I don't want to hire anybody," says John Horne, chief executive of Navistar International Corp., which builds commercial trucks and diesel engines. He and his staff aim to cut fixed costs and employment levels and hold them once orders start coming back. Mr. Horne says when a recovery comes, he will have to handle it with a smaller base of assets and employees.
-- Chad Terhune and Jeffrey Ball contributed to this article.
Write to Jon E. Hilsenrath at jon.hilsenrath@wsj.com
Updated February 28, 2002 |
