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Fiscal Uncertainties Are Weighing on Companies’ Expectations

Last Friday, the House of Representatives voted (203-189) to approve a stopgap spending bill to fund the government through mid-December. Indeed, in order to extend the current government spending at the current rate and to avoid a “government shutdown” after September 30, Republicans-controlled House chose to attach a provision to dismantle President Obama’s health care law “Obamacare”.

 

However, the provision has no chance of approval as it will face a veto from President Obama in the Democrats-controlled Senate. Today, the Senate should begin to debate on the spending bill where Senate Majority leader Reid (D-NV) will reject the provision and will send the bill back to the House.

 

Nevertheless, even if Democrats and Republicans find a compromise on a temporary bill until mid-December, they will need to specify the 2014 budget. The fact is Democrats want to spend $1,058 billion for fiscal 2014 while the budget control acts sets spending caps at $967 billion ($109 billion of sequestration). Some want to meet the spending caps by allocating more on defense and less to civilian programs. Finally, some Republicans are asking for larger cuts to entitlement programs, to which Obama is unlikely to agree. The only good news is that, in the worse case, sequestration will not happen until January (after Congress holidays).

 

Moreover, concerning fiscal issues, some press reports suggest that House of Representatives will also try to vote on debt limit this week as the Treasury Department predicts the debt ceiling will be reached by mid-October. The legislation would seek to increase the debt ceiling until Dec-2014 and likely include approving the Keystone XL pipeline, reforming the corporate and households’ tax code, delaying “Obamacare” and eliminating the Consumer Financial Protection Board (CFPB). Remind that if Congress does not reach a deal to raise the debt limit, a default and/or debt downgrade could ensue.

 

Debates are already weighting on companies’ expectations. The BRT’s (Business RoundTable) third quarter CEO Economic Outlook Survey, released on September 18, show slightly more optimism about the economy with lower expectations for sales and capital investment. Note that the composite index fell to its lowest level since 4Q 2012.

 

 Source: Business RoundTable

 

 Source: Business RoundTable

 

The survey which included an additional question concerning the effects of political stelmate show that 50% of respondents indicated that the ongoing disagreement in Washington is having a negative impact on their plans for hiring additional employees over the next 6 months.

 

In this context, my view remains that growth could be sluggish at least until Congress validates the stopgap bill and raises the debt ceiling (mid-October/beginning of November). As a consequence, Fed policy will remain accommodative so that “tapering” will not start before December.

US CEOs Are More Optimistic on Economy

According to the Business Roundtable survey, the group’s CEO Economic Outlook Index rose to 84.3 in the second quarter from 81 in the first quarter and 65.5 in the fourth quarter of 2012. The current Index is at modestly above its long-term average level of 79.3.

 

CEOs expect a slight improvement in economic output over the next six months, with modest improvement in sales expectations and hiring. Yet, they planned to spend less on capital projects in the next six months.

 

The Roundtable surveyed 141 CEOs from May 13 through May 31 and any reading above 50 indicated economic growth was expected.

 

The percentages in some categories may not equal 100 due to rounding.

 

CEO expectations for the U.S. economy increased for the second time in five quarters. They assessed the GDP would grow at a 2.2. annual rate in this survey, up from 2.1 percent expect growth in last quarter’s survey. Nevertheless, CEOs believe that political uncertainties are still a drag:

 

“Overall, CEOs see the U.S. economy still on a slow road to recovery. Relative to economic conditions, business performance remains strong, but the U.S. government’s unresolved long-term fiscal path and an uncertain political environment are key obstacles to more robust economic growth and hiring.”