One on One With Terry McGraw, Chairman of the Business Roundtable
Monday, September 18, 2006
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SUSIE GHARIB: The CEOs of some of America`s biggest companies expect the U.S. economy to slow over the next six months. That`s the result of a new survey today from the Business Roundtable, showing lower expectations in sales, capital spending and hiring. Joining us now to talk more about the survey results, Terry McGraw, the new chairman of the Business Roundtable and chairman of the McGraw-Hill Companies. Welcome back to NIGHTLY BUSINESS REPORT, Mr. McGraw.
HAROLD "TERRY" MCGRAW, CHAIRMAN, BUSINESS ROUNDTABLE: Good to be with you, Susie.
GHARIB: The CEOs in your survey said that they expect the economy to grow only 3 percent in 2006. That`s slower than most economic forecasts that I`ve been seeing. Tell us why you think that CEOs have become so cautious.
McGRAW: Well now we`re talking about the third quarter economic summit. As part of that, what we`re looking at is the next six months out and the sentiment of the CEOs of the Business Roundtable had said that they think that the economy is growing about 3 percent. However, I have to urge that`s the sentiment and that`s a feeling. We did about 4.25 percent GDP growth in the United States in the first half of this year. And therefore, that would put it under 2 percent if you did the math for the second half and I don`t think that. Most economists have it up around 3.5 percent for the year. Now, the difference is that what CEOs are seeing is a decided slowdown as health care costs, as we see energy prices and other commodity prices as well as interest rate hikes taking effect and that will slow down the economy.
GHARIB: We`ve certainly seen it in one of the questions that you asked your CEOs about capital spending. Only 39 percent of the CEOs surveyed said that they would increase spending. That`s down from about 50 percent a few years ago. So I guess...
McGRAW: Yeah, that`s a big number. GHARIB: We can`t count on businesses to offset a drop in consumer spending, right?
McGRAW: No. I mean I think what you`re seeing right now are CEOs being very cautious and some are concerned about the environment ahead. Therefore, being very cautious, you know, with their capital allocation process. But that and employment being a little bit softer with the two factors that are different from the second quarter report, but I would also say this is a normal behavior for this part of the economic expansion. Usually you see growth start to decline and then productivity will decline slightly. And then we`ll start seeing inflation which is a lagging indicator start to creep up. It`s about 2.7 now. It will get up towards 3 percent before -- this is core inflation now -- excluding food and energy and then it will come back down again a little bit next year.
GHARIB: Let me talk a little -- you mentioned hiring. Let`s look at our graphic on hiring, a gloomy forecast there. And also, for sales growth, a few months ago those numbers were also higher. Do you think that the Federal Reserve rate hikes are the culprit here? Do you think the Fed overdid it?
McGRAW: I don`t think they`ve overdone it, but I think it was good to take a pause. Now as inflation starts to heat up just a little bit, you know, what you`re going to see the Fed doing is thinking hard about whether it needs one more rate increase. And so I don`t think anything is going to take place on Wednesday when the Fed meets, but in October, October 24, when the Fed meets, you know, you could see, could see, one more hike. Now, my guess is not, but there is a problem that there could be. But having said that, I think the effect of slowing down the economy has taken shape and I think by mid year next year we probably will see some cutting of interest rates and starting back down that cycle.
GHARIB: On that track of thinking, your survey was done in August. Since August we`ve seen oil prices fall sharply. Do you think if you did your survey today, the results would have been a little more optimistic?
McGRAW: We`re going to have to watch that, Susie, but you`re absolutely right. Between August 25 and September 8, the survey was completed. Oil prices were very high at that time. Energy prices overall were very high at that point. We`ve seen a marked decline in those prices. Now if they stay there or decline even further, I think that has very positive tones for growth implications and we might see a very different picture. However, if that risk comes back then it could be a little worse.You`re going to watch the capital spending number to get a good indication.
GHARIB: We`ll check in with you the next quarter when you come out with your survey. Thank you so much for tonight though.
McGRAW: Thank you, Susie.
GHARIB: We`ve been speaking with Terry McGraw, the new chairman of the Business Roundtable.
