Companies kicked into gear at the end of 2012, acting to forestall the brunt of the potential fiscal cliff. More than 80 CEOs joined the Fix the Debt coalition. Others chose to accelerate dividend payouts in anticipation of a potential increase in dividend-tax rates from 15 percent to 40 percent. In the financial sector, directors reported their companies were most likely to increase cash reserves, according to results from the Q4 NACD Board Confidence Index (BCI), conducted in early December. Across all sectors, directors responded that their companies were reassessing corporate strategy to prepare for the coming year.
Uncertainty trumped optimism in the fourth quarter of 2012. And not without reason—a close presidential election coupled with the looming fiscal cliff and Congress’ inability to develop a solution left the nation waiting until the last minute. Conducted in the first weeks of December, NACD’s Q4 BCI score dropped nearly three points from 54.5 to 51.8. A score above 50 represents optimism regarding the current state of the economy. Scores near 50 mark uncertainty.
Attitude Shift in Future Outlook
The 51.8 score represents the second-lowest registered by the BCI—the lowest was 47.5 in Q3 2011. In its two-and-a-half-year history, scores have fluctuated between uncertainty and moderate optimism. These composite scores are generally the result of boardroom pessimism in the short-term state of the economy buoyed by an optimistic long-term view of economic progress—both progress made to date and to come.
In Q4, however, the outlook shifted to optimism in the boardroom’s retrospective view—current economic conditions versus those three months and one year ago—lifting pessimism in both the short- and long-term future states of the economy. Looking ahead to the state of the economy in three months, boardroom confidence dropped eight points—15 percent—to a gloomy 44, the lowest score to date.
Peer indices provided mixed sentiments in the fourth quarter. The Conference Board’s quarterly CEO Confidence Index posted a recovery of 4 points, moving from 42 in Q3 to 46 in Q4. However, a score of 46 still places the index in negative territory. Consumer indices moved in the opposite direction. The Conference Board’s Consumer Confidence Index dropped 6.4 points in December to 65.1. A similar measure, the University of Michigan’s Consumer Sentiment Index fell nearly 10 points in December, from 82.7 to 72.9.
Amid reports on the Olympics and presidential race, the flagging economy has been firmly in the news this week. In the second quarter of 2012, U.S.economic growth slowed to an annual rate of 1.5 percent, even slower than its 2 percent growth in Q1 2012. This lack of growth suggests the economy is at risk of stalling, a sentiment echoed in NACD’s Board Confidence Index (BCI), which dropped over 8 points in the second quarter to 52.4. The BCI’s second lowest score since its inception in September 2011, this overall index denotes directors’ uncertain view of the state of the economy.
Since its introduction in 2010, NACD’s BCI has trended with peer indices—showing fluctuations and improvements, but generally not enough to support a fully recovered economy. The University of Michigan and Thomson Reuters’ measure of consumer sentiment for July followed suit, dropping to its lowest point since December 2011. However, after the Conference Board’s Consumer Confidence Index dropped to a five-month low in June, it regained several points in July, moving to 65.9 from 62.7. According to Richard Curtin, chief economist of the University of Michigan Consumer Sentiment Index, the continued decrease in confidence is the result of consumer expectations, specifically the belief that “current economic policies are incapable of solving the problems facing the economy.”
This lack of confidence in the government’s ability to address economic issues early is evident in the boardroom. When asked about the nation’s progress in the past three months, as well as expectations for the next three months, levels dropped below 50 points, indicating little confidence in the nation’s short-term prospects. Confidence in the economy’s progress over the last year took the largest hit—dropping from 64 in the first quarter to a slightly more than uncertain 56 in the second quarter. In its history, it is not unusual for director confidence in the short term to waver in the 50s. However, when long-term scores drop to this range, it is not uncommon for the overall index score to significantly drop.
Current fears of a stalled recovery are not going unnoticed, however. Following its two-day meeting this week, the Federal Reserve is prepared to launch another round of stimulus to bolster the economy. While the bank has not yet formally announced this intervention, if unemployment and growth continue on the current path, it is only a matter of time.
Confidence in the economy is a broad topic to discuss. Just as one area starts to show positive growth, the world is shaken by a different downturn or disaster. In an article last month in the New York Times, economist Paul Krugman discussed the increased complexity of the current economy, compared to the months following the most recent financial crisis. In late 2008, the world’s collective attention was on the falling stock market. Today, there are many areas contributing to overall economic confidence: inflation, employment, oil prices and so forth. As Krugman notes, “we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears.”
NACD’s most recent Board Confidence Index (BCI) reflects this conflicted view. In Q2 2011, the Index fell from 64.9 to 63.1, the first time it has dropped since its creation in the autumn of 2010. When asked to characterize the current state of the economy compared to one year ago, directors registered a confidence index of 68, a decrease of five full points since Q1 2011. Directors also feel less confident in the progress made in the short run—looking at changes in conditions over the past quarter, confidence dropped to 59 from 61.
However, the slight decline in confidence is countered with a more optimistic view for the coming months. Just this week, Federal Reserve Chairman Ben Bernanke projected increased growth for the next six months in remarks following the Central Bank’s Beige Book release. According to Bernanke, policymakers will be focused on the labor markets. According to the Q2 2011 BCI, the boardroom agrees. Despite slowed growth, nearly half of corporate directors (43%) plan to expand the workforce in the upcoming quarter. In addition to hiring practices, directors are generally more confident regarding the future. Expectations for the next year stand at an assured 67.
Recently released data from The Conference Board (TCB) echoes the caution seen in the boardroom. Despite higher predictions, TCB’s Consumer Confidence Index fell to 60.8 from a revised 66 in April. Unsurprisingly, American consumers are troubled by the current combination of increased costs for food, the increased cost of oil and the depressed real estate market.
The Board Confidence Index is conducted by NACD in conjunction with Heidrick & Struggles and Pearl Meyer & Partners. Q3 2011 results can be expected in September.