Ron Bullock, the owner of Bison Gear & Engineering in St. Charles, Ill., talks about the current environment for businesses in dramatic terms. “When it comes to economic uncertainty, I think we’re coming up to a perfect storm right at the moment,” says Bullock, whose industrial and commercial motor manufacturing company employs 300 people.
Bullock points to the Obamacare decision pending from the Supreme Court, “taxmageddon” – the scheduled expiration of Bush-era tax cuts and the payroll tax holiday put into place under President Obama, among others – along with a raft of across-the-board cuts in federal spending set to take effect starting next year. That’s not to mention the unresolved debt crisis in Europe or the slowing of the economies in emerging markets like China and India.
“You need to know what’s going to happen,” Bullock says. “If you had a little more certainty, that’s what people would like to see, even if it was unpleasant medicine.”
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The U.S. economy is stronger now than it was a few years ago, but as with the rest of us, CEOs like Bullock remain unsure that the economic gains will be sustainable – or if Congress and the president can reverse the pattern of dysfunction in Washington. Uncertainty is always part of the business environment, but the lack of clarity surrounding major policy issues has jumped significantly in recent years, according to economists who have studied the issue.
An index of policy uncertainty devised by economists at Stanford University and the University of Chicago found that policy ambiguity has been at historically high levels over the last few years, peaking around the time of the debt-ceiling debacle last summer. A repeat of an ugly partisan battle over raising the debt limit could add to the uncertainty and raise anxiety.
“In the past, there were questions about the tax code – maybe three or four getting ready to expire, you don't know exactly what's going to happen to them. Today it's virtually the whole code,” says John Engler, president of the Business Roundtable. “There's just not much today that a business can make a decision on and be confident that something fundamental, something possibly very expensive will be different in six months or a year.”
As a result, more companies are exercising caution. “They are holding off on decisions,” Engler says of certain businesses. “If they use cash, they're using it to pay down their debt or be able to secure larger lines of credit just so that they’ve got liquidity if some of the risks we’re hearing about become reality.”
Those concerns have been around for months, at least. “Obviously, we all wish that we could get to some conclusions in Washington, so at least get some certainty even if the answer isn't perfect,” Jim McNerney, the CEO of Boeing and chairman of the Business Roundtable, told reporters in the spring. “And that remains unresolved and a big creator of uncertainty for a lot of us.” But as spring has turned to summer, the economy continues to sputter along and those concerns remain unheeded, the sentiment among executives has turned more pessimistic.
EUROPE TAKES A TOLL
Many who in the first quarter of the year said their outlook for spending and hiring had improved are once again pulling back. The uncertainties are affecting business planning. Cisco Systems, which makes the equipment that serves as the backbone of the Internet, is still often seen as a bellwether for tech spending. On a conference call with analysts last month, Cisco CEO John Chambers described the effects of uncertainty on the economy.
Customers are still saying they plan to spend more in the second half of the year. “However,” Chambers explained, “in the very next sentence they said, we are waiting to see what happens in Europe and what happens with government policy.” Chambers said his industry peers are seeing the same thing: not a decline, “but just very steady improvement and an uncertain and cautious wait-and-see type of environment.” (Intel CEO Paul Otellini countered Chambers’ view the very next day by telling analysts and investors that his company hadn’t seen any change in information technology spending: "I'm not seeing what he's seeing. I think John's comments were more about Europe.")
So the mood among corporate executives is less cheery than it had been just a few months ago – and concerns about business and consumer demand remain the top reason for that; but uncertainty is a big factor as well. A new quarterly survey of more than 440 chief financial officers released today by Duke University and CFO magazine found that 35 percent were less optimistic about the U.S. economy compared with last quarter, while 25 percent were more optimistic. Last quarter, just 15.3 percent said they were less optimistic, while 53.5 percent said their outlook was improving. When asked to rate their optimism on a scale of 1 to 100, the median this quarter came in at 55, down from 60 last quarter.
JOBS ON THE BACK BURNER
The effects of uncertainty can be seen in hiring plans, in particular, as evidenced by last Friday’s dismal employment report, which showed just 69,000 jobs added in May -- less than half what economists had been expecting. “The overall sentiment – and certainly after seeing last Friday’s jobs report, this sentiment is only going to grow stronger – is that employers are still very cautious about adding permanent staff to their payrolls,” says Joanie Ruge, chief employment analyst for staffing company Randstad, which works with Fortune 500 companies and smaller ones as well. “In fact, they are talking to us more about actually using temporaries and contract labor to give themselves some flexibility for the rest of this year and even as they look into 2013.”
In part, what we’re seeing are lingering scars from the recession, as companies that were forced to cut employees are hesitant about hiring and then having to endure layoffs again. Businesses also were able to wring more efficiencies out of their operations through investments in technology and streamlining their processes. “Many companies became smarter through the recession," Ruge says. "They learned how to manage their businesses better. They learned how to drive more revenue with less people, drive profits, run their businesses more efficiently – because they were forced to. It was something they had to do to survive through the difficult economic conditions.”
Those improvements, though, are not the only factor behind the lack of hiring. “All eyes are on Washington right now to see what’s going to happen, and so employers are putting off some hiring to wait and see how things are going to shake out,” Ruge says, citing the November elections. “And you also have what’s happening in Europe.”
PLAN A, B, OR C?
The combination of those factors, on top off the lessons learned during the downturn, are creating what Ruge also calls a wait-and-see approach, particularly among small and medium-sized businesses. “You have a lot of small to medium-sized business owners that are looking at investing and growing their company,” she says, “but they’re still in a little bit of a wait-and-see mode because they’re not sure what the implications are going to be, from a tax standpoint. Certainly, we’re talking to them about health care reform and how that could impact them.”
That’s in line with what AT&T CEO Randall Stephenson told analysts at an investor conference in New York last week. “The very high end of business, we’re seeing good robust investment. People are spending money. The wallets are open,” Stephenson said. But those large businesses aren’t hiring, and the situation gets worse among smaller companies. "As you go down-market, it's getting tighter and tighter, and you're seeing the wallet for investment being less open."
For businesses of all sizes, the challenges of the economic landscape require more advanced planning. “From the conversations that we have with our clients at Randstad, they are working through all the different scenarios, but there’s still uncertainty,” Ruge says. “They’re having to work through a couple of different options. But at the same time, they can’t be held hostage and not growing their business or investing in their business.”
Business leaders need to put together plans that include at least three different scenarios, says William J. Hass, CEO of TeamWork Technologies, a business strategy consultancy. "The days of a 12 month ‘single value’ forecast have been replaced with the need to do rolling monthly forecast, many with a most likely, best case and worst case scenarios.”
CEOs, especially those who don’t plan for the various ways the current uncertainties could be resolved, could be met with surprises. Says Hass: “The forecast for the next six months for many businesses will be influenced by political issues, trends and the election results much more than they expect.”
Michelle Hirsch contributed reporting for this story.