With a record high stock market and rising incomes, as well as record low unemployment and mortgage interest rates below four percent, the overall picture of the economy looks rather positive. Not surprisingly, most American consumers think the economy is doing pretty well.
American CEOs, on the other hand, are more skeptical. In fact, the perception gap between the two groups has never been wider.
Who is right?
Trade War Hurting Confidence
One could argue CEO’s have a much more accurate reading on the future of the economy although the future hasn’t arrived yet. That’s exactly what’s going on with U.S. corporate leaders. The giant panda in the room is the continuing erosion of confidence brought about by the trade war with China.
CEO pessimism is confirmed by a recent survey showing CEO confidence falling to a 34 in the third quarter of this year, down from a 43 in the second quarter. A score of 50 or above indicates a positive outlook by CEOs.
Is that pessimism justified?
The Trade War
According to the latest news, phase one of the negotiations is almost complete. How much of that is hype and how much is reality is not yet clear. But unfortunately, getting firm terms—let alone real action—in trade agreements with China has proven elusive.
The latest round of “good news” about tariff relief being imminent notwithstanding, much more on the trade front would have to occur to change the current economic trajectory. But first and foremost, at even a basic level, an enforceable agreement between the United States and China has to be signed and sealed and put into action.
That hasn’t happened yet. News reports continue to tell us that it almost has, but not yet. Just as important, though, the deal has to be large enough to have a real impact on trade imbalances and jobs. Both of these pieces are still missing.
A Healthy Skepticism Is Warranted
There are a few other reasons why skepticism is warranted. For one, it’s not certain the current agreement about having some tariffs removed will ever be signed.
For another, the signing date between U.S. and Chinese trade officials keeps getting moved. It’s also just as likely some of the terms are changing as well. That may a be sign that more tariff relief is being negotiated or that less relief, or even none, is on the horizon.
What’s more, as the European Union has recently discovered, even signed agreements with China are literally a coin toss as to whether they’re implemented. According to the European Union Chamber of Commerce, nearly half of the trade deals China signed in 2018 have yet to materialize.
It’s certainly likely that U.S. CEOs are well aware of the less-than-certain outcomes of new trade deals signed with China. This is particularly relevant to the forced technology transfers that have greatly benefited China’s economy over the past decades.
Unfortunately, China continues to resist any fundamental changes in its industrial and technology policies. That’s a critical sticking point. Lack of progress will result in a fourth round of tariffs by mid-December. Perhaps that’s what CEOs are expecting.
Consumers, Not CEOs, Drive the Economy
On the flip side of things, consumer confidence and behavior are what drive the U.S. economy. Making up almost 70 percent of U.S. GDP, consumers are much more confident about their economic future than CEOs. Even though it has dipped slightly from September to October, from 126.3 to 125.9, consumers’ confidence remains high, as does consumer spending.
As a result, GDP continues to grow, even outpacing third quarter expectations of 1.6 percent by growing at 1.9 percent. This unexpectedly higher growth occurred even though both business investment and public spending were lower for the quarter.
What’s more, lower tax rates, the record stock market highs and rising home values are all putting more money in the pockets of Americans, consumers included. Of course, as I’ve noted in a prior article, President Trump talking up the economy has a tangible impact as well. All of these factors contribute to higher confidence levels as well.
You Can’t Dismiss CEOs’ Concerns
But as noted earlier, CEOs have an advantage over consumers in seeing what’s ahead on the economic road. They have a clearer picture of how their companies will perform in the coming months. The trade war is not only impacting operating costs in terms of tariffs, but also in terms of changing supply chains. These two factors can have a big impact on performance.
For these reasons, and others, CEOs’ concerns about the economy should not be easily dismissed. Their pessimism could certainly indicate that they see negative outcomes ahead in terms of what their profit levels will be, and how all of those factors may impact their stock prices.
And speaking of stock prices, record price levels aren’t always a good thing. In fact, conventional wisdom tells us that the higher stock values rise, the less room they have to go higher. That leaves declining values as the most likely outcome sooner or later.
Falling stock values are also something that CEOs are keenly aware of. Conversely, consumers are usually the last to realize that a bear market has begun.
James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.