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E-mailTwo years makes quite a difference. When given a choice of describing the U.S. economy as excellent, good, fair or poor, only 1 percent of U.S. CEOs surveyed in 2007 chose poor. Last year it was 29 percent. Today a solid 90 percent of U.S. business leaders would use that four-letter word to describe the American economy. Since the NYSE Euronext survey a year ago, the world has undergone seismic change. The economic crisis that led to the collapse of major financial institutions affected nearly every industry, bringing about the evaporation of credit, stock prices and corporate profits. CEOs, scrambling to keep up with an economic climate that one chief described as “the worst I have ever experienced in my career,” slashed spending, laying off scores of workers and shuttering divisions in an effort to preserve cash. The government stepped in with $3 trillion in aid and a pledge to overhaul lending practices and executive compensation at companies receiving the aid. Caught in the middle were consumers, who watched the values of their homes and retirement plans plummet while worrying that their jobs would be the next to be cut.
Yet glimmers of hope are emerging. The men and women running the world’s top businesses are calling it a sea change, a clean slate and a chance to shed the excesses and missteps of the past in favor of a solid, back-to-basics way of operating their companies. They do acknowledge that the U.S. and global economies aren’t out of the woods, yet nearly half of those surveyed believe the U.S. economy will fully recover by the second half of 2010. An additional 44 percent of respondents say a full U.S. recovery won’t happen until at least early 2011.
A global recovery, CEOs say, will take even longer. Only one out of four business leaders believes a full global recovery will happen by the second half of next year; 61 percent predict it won’t come until early 2011 or later. Whenever the recoveries do happen — here and abroad — nearly three-quarters of CEOs say the rebound will be slow, with periods of stagnation.
Craig Sawin, president of Medley Global Advisors in New York City, a top policy adviser to financial firms, says what worries business leaders most is the uncertainty inherent in the crisis. “No one has been around long enough to have ever experienced something like this before,” he says. “The shift in thinking, the role of government in business — there’s almost a sadness I’m hearing over the fact that the free market didn’t take care of itself and we needed the government to come in and help out.”
Joseph R. Ficalora, chairman and CEO of New York Community Bancorp, Inc. (NYB), agrees with the assessment last year that former U.S. Treasury Secretary Hank Paulson and Federal Reserve Board Chairman Ben Bernanke needed to do “something overt to stop the momentum that was taking our economy over the cliff,” but he says the Troubled Asset Relief Program (TARP) has been “misdefined.” Contrary to public perception, “TARP was not designed to bail out companies,” Ficalora says. “Rather, one of three things has happened. Starting with the positive, some of the TARP recipients were actually able to increase their lending and upsize their companies. Second, in the case of those companies that have returned the funds they received, the consequence has been adverse — it cost money to buy out the warrants, and it necessitated the dilutive issuance of stock in a market that has been less than favorable. And third, in the case of those TARP recipients where management was unseated, the business culture at the company has been significantly changed. In my view, more companies were hurt by TARP than helped by it.”
Looking Beyond the Consumer
CEOs and economists are certain that it will take more than reigniting consumer spending for the recovery to take hold. Joseph Stiglitz, a professor of economics at Columbia University and author of the book Making Globalization Work, says that before the economic crisis, “America’s debt-ridden consumers were the engine of global growth.” That model has broken down, he says, and will not be replaced soon. Instead, corporate America would be better served, Stiglitz says, by investment tax credits that encourage businesses to spend money on technology and other productivity-enhancing mechanisms. “We’ve spent the past seven years focused on investments in housing and how to keep the consumer spending,” he says. “We need to put our attention elsewhere to drive this recovery.” In fact, maintaining low interest rates to spur consumer spending is a flawed tactic, says Stiglitz. “We’re going to make up for it in about two years when we have a new round of consumer loan defaults,” he says. And when will the economy recover? Stiglitz prefers to frame the question differently: “When will growth stop being negative? Later this year or early 2010. When will we be back to normal, with unemployment down to around 5 percent? I’d say 2012 is optimistic.”
Adds James P. Dolan, CEO of Dolan Media Co. (DM), a business publishing and services company based in Minneapolis: “Housing has a huge impact on the overall economy, and the ‘wealth effect’ of housing drives much of consumer spending. The housing market’s woes will keep the consumer downbeat for several more years.”
