Since the financial crisis, uncertainty in regulatory activity has been the sole constant factor. Dodd-Frank, resulting activity from agencies such as the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Federal Reserve, healthcare reform legislation, the JOBS Act, and now debates over the debt ceiling have kept those in the boardroom on their toes. Further, rarely have established economic indicators served as heralds of the market’s health—and this quarter proves no different. The metrics tell different stories: Executives think the economy is improving, but fewer mid-sized companies expect to increase capital spending. Consumer confidence fell nearly 10 points in March, but CEO confidence rose nearly 8 points in the first quarter. Similar to executives, directors are demonstrating optimism in the strength of the markets: the NACD Board Confidence Index (BCI) jumped almost 10 points in Q1 to an overall score of 61.
From one perspective, this improved confidence from both directors and executives may represent that business leaders have grown accustomed to the certainty of uncertainty. Despite insecurity caused by regulatory and geopolitical activity, the markets have shown slow but steady growth, which directors and executives seem more willing to bet on.
Looking at historical trends in director confidence, however, this first quarter jolt might not be much more than a blip. Consistently, the BCI score is most optimistic in the first quarter of the year. Throughout the rest of the year though, that optimism tends to dwindle and typically fails to reach that initial level. In 2011, Q1’s score of 64.9 lost more than one-quarter of its original value by Q3. In 2012, a similar trend occurred: the Q1 score of 60.6 dropped significantly, and each remaining quarter failed to regain such a level of confidence. In fact, in both 2011 and 2012 first quarter confidence was at least five points higher than the ensuing year’s average.
Interestingly, boardroom uncertainty may have manifested in a different metric—confidence in one’s own industry relative to the general economy. The first quarter of 2013 marks the first time that NACD’s BCI measure for overall board confidence in the market was substantially higher than the score for directors’ industries: 61 vs. 58, respectively. Since 2011, directors have scored their industry an average of 5.75 points higher than the overall index.
Although one could predict that this year will follow the observed trend of first quarter confidence dwindling through the rest of the year, several metrics show that boards may buck this trend. Setting it apart from prior first quarters, in Q1 2013, 36 percent more directors indicated their companies expected to expand their workforces in the next quarter. In comparison, those projecting to hire in Q1 2012 and Q1 2011 represented 14 percent and 16 percent declines from the previous quarters, respectively. Additionally, when asked about economic conditions in one year, directors responded with a relatively confident score of 65. The second quarter of 2013 will confirm whether this optimism is short or long term.
On the heels of the Republican and Democratic National Conventions and the 2012 presidential elections rapidly approaching, both parties have asked voters to compare the current state of the country to its status four years ago. This assessment is no small task—the highs and lows of the last several years have proven difficult to pinpoint by previously used indicators. While the housing market is beginning to show signs of improvement and the stock market has been on a definite incline since 2009, the unemployment rate remains uncomfortably high.
Two years ago, NACD launched the Board Confidence Index (BCI) to provide a snapshot of the economy from the boardroom’s perspective. While peer indices track sentiment and confidence levels from consumers, CEOs, and investors, the BCI surveys public company directors—those who are responsible for providing guidance to companies, with the long-term strategic objectives in mind. In fact, during the last few tumultuous quarters, the boardroom has trended with peer indices, albeit more moderately.
In the 3rd quarter of 2011, the BCI registered its lowest score in face of what appeared to be a stalled economic recovery. In response to disconcerting discussions regarding the national budget, Standard & Poor’s downgrade of the U.S. credit rating, and fears of inflation and stagnant unemployment figures, the Index registered a less-than-confident 47.5. When asked about current economic conditions versus the prior year, directors responded with a score of 46—demonstrating an uncertain view that the nation had made progress. Nearly half of respondents indicated conditions were moderately or substantially worse.
Jumping ahead to today, the economy is facing many of the same issues as one year ago. The fiscal cliff looms, the Federal Reserve has signaled it may undertake a third round of quantitative easing in the coming months, and the European debt crisis weighs on the global economy. As such, NACD is once again soliciting the opinion of its membership for the BCI: Is your company better off today than it was one year ago?
This quick survey should only take 2 minutes of your time. Click here to take it.
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.