CEO Confidence Index, i.e. trust among CEOs

We described the indicator in the previous text Customer Confidence Index, which was developed decades ago by The Conference Board. The mentioned organization has created many other tools. One of them is CEO Confidence Index. As you might guess from the name, it concerns the trust of CEOs of large companies. However, they are not asked about their private purchasing plans, but about their expectations regarding the economic situation. Is it worth following? In this article, we will describe the advantages and disadvantages of the mentioned indicator.

What is the CEO Confidence Index?

It is an indicator prepared on the basis of surveys conducted on 100 chief executive officers (CEOs). The CEOs mentioned work in companies from various industries.  Data collected from surveys are aggregated, analyzed and published by The Conference Board. Many analysts closely follow the CEO Confidence Index because they believe that the indicator can provide information about the mood of senior management in American companies.

The index itself is the most important measure determining the mood of American executives. It is worth examining the survey itself, which consists of questions regarding views on the current and future situation in the economy or industry. CEOs must answer whether they are more positive (“bullishly”), or negative (“bear”).

The questions concern:

• expectations regarding the condition of the economy and comparison to the forecast 6 months ago;
• the current economic situation and comparing it to expectations from 6 months ago;
• industry expectations vs 6-month forecasts;
• current situation in the industry vs. 6-month forecasts.

The survey is sent electronically to selected CEOs. It is important to select the appropriate respondents so that there is not too much concentration in a specific industry.

The CEO can answer each question in 5 ways:

• definitely better – 100;
• slightly better – 75;
• same – 50;
• slightly worse – 25;
• Definitely worse – 0.

The question regarding expectations regarding the economic situation in the entire economy is very important because it allows us to assess how managers of important companies operating in the USA view the economic situation. If expectations are much better than 6 months ago, then you can expect companies to invest more in the near future and possibly need more employees. This may mean an acceleration of the economic growth rate (during expansion), or a slowdown or even a halt to the market downturn (e.g. during the recession). If expectations are more negative than six months ago, we can expect the economic situation to deteriorate. This will most likely mean smaller investments and even a reduction in employment.

The next question is to look at the current economic situation and compare it with 6 months ago. This indicator is much less important than the previous one because it tells us what is present. For an investor, the most important thing is to look at what the economic situation will look like in the future. Therefore, this indicator can be useful as looking for extreme pessimism or optimism. Then there is a high probability that we are approaching the end of a recession or an economic boom.

The next two questions concern forecasts and the current situation in the industry in which the surveyed CEO's company operates. For investors, this may be a hint about the companies' future performance. Extreme readings of this part of the index may help you decide to buy or sell shares or ETFs with exposure to a given sector. The best time to buy stocks is a period of extreme pessimism, while the worst time to buy stocks is extreme optimism (which usually heralds a trend reversal). Of course, it is not worth basing an investment decision solely on the CEO's answers.

Why should you look at the CEO Confidence Index?

Senior managers make key decisions regarding the allocation of company resources. Considering that the respondents are CEOs of large American companies, their opinions on issues related to the condition of the industry or the entire economy may be valuable.

CEO pessimism may cause companies to reduce investment levels, which will impact GDP. This, in turn, may translate into revenues and profits in other industries. If a decision is made to reduce employment, consumption in the economy will also decline and the state budget will deteriorate (lower tax revenues and higher social spending).

What are the disadvantages of the indicator?

No one is infallible, and CEOs also don't know everything. Being a good manager or business owner does not mean that such people really are “they feel” economy. They are certainly specialists in their industry, but they can make mistakes here too. If CEOs really could predict the future, there would most likely be no failed investment projects or acquisitions in US business history. Therefore, you cannot approach the indicator's readings uncritically. It's always better to approach survey results with mild skepticism.

Key conclusions:

• Surveys are collected from 100 CEOs working at U.S. companies across a variety of industries;
• The reports include opinions on the CEO's expectations regarding the future economic situation;
• The indicator can be used for economic forecasts for the coming months;
• For many analysts, the above-mentioned index may be an important source of data needed to make forecasts regarding the upcoming economic situation.