Normally, a survey of top executives about the economy should receive little attention from economists.  After all, forecasters spend their lives analyzing conditions while CEOs are, or ought to be, focused on their company’s strategies and resource management. 

However, some of the expectations by people in the trenches should be heeded by the big picture forecasters. 

One of the most difficult components to forecast is capital spending.  Listening to the CEOs and their desires to increase such spending provides some guidance.  (However, shifting cash flow, changing interest rates, and achievement of sales projections could alter that guidance as the year progresses.)  Refined expectations about the latter variables are what a good economist may bring to the table. 

Anyway, CEOs are not happy about the economy they see on the horizon.  According to the Business Council survey, they see less than 2 percent growth for the U.S. economy.  Only a fifth see sales growth slowing for their own companies, however.  (We will ignore the inconsistency for now.)

Surprisingly, half the executives believe profit growth will accelerate despite the lapse of the accelerated depreciation provision at the end of this year and the less than trend growth rate projected for the economy.   If their economy outlook is on target, there will be a lot of disappointed CEOs when they tout up their profits. 

Of course, I could go on and on in explaining the economic inconsistencies of such a survey and why most CEOs really need advice from economists. 

Instead, I should like to drill down to two issues uncovered by the survey. 

The survey suggests that capital spending will rise only slightly next year.  Only 42 percent expect to increase capital spending modestly in 2005.  As spending adjusted for price declines actually rose at double digits this year, that expectation does not bode well for continuation of strong capital spending. 

As the year progresses, sales may surprise, capital costs may change, and cash flow could be significantly different than projected.  If so, capital spending could be different from these expectations. 

However, profit growth probably is too optimistic (certainly that is true for the anticipated economy).  Most CEOs with whom I talk are surprised at how high I expect short term interest rates to go and are not aware of the changing tax consequences of their investment decisions.  In both cases, these changes would work against capital spending. 

U.S. sales may be higher than they expect (my forecast is being market down because of high energy prices but still exceeds 3 percent growth for the year).  Nevertheless, that favorable sales outcome will merely offset the unfavorable profit, capital cost, and cash flow prospects.  Therefore, a continuation of double digit growth in deflation adjusted capital spending is unlikely.  I now am using something closer to 6 to 7 percent gains. 

The other issue is their reason for economic concern.  They worry about high medical costs for their benefits programs.  Indeed, stemming the medical cost growth may do more to preserve U.S. jobs than any tax or subsidy scheme that economists may be drafting to stem the outsourcing tide. 

But their major worry is about terrorism. 

I have tried to explain to my business audiences that terrorism is an exogenous variable.  By that I mean that it is important and will alter the economic landscape.  However, it is not a variable that can be used to make good economic decisions about hiring, capital spending, the abandonment or pursuit of markets, etc.  It impacts the system but is not part of the system. 

Now I do not wish to belittle terrorism.  A dirty nuclear bomb might do immense damage.  Certainly, we should invest in protection from such outcomes and make clear that if such activity occurs the response will be swift and overwhelming. 

But you do not alter the investment and hiring decision because of exogenous variables.  You do not let such possibilities freeze decision making.  (Consumers show no evidence that terrorism fears are impacting their spending.)

One would think that CEOs would understand that they cannot change their investment plans because terrorism may strike.  Indeed, if they continue to do so, they are allowing terrorism to win through threats alone. 

Let us be vigilant and do what needs to be done to avoid and, if necessary, repel and defeat terrorism.  However, let that be outside the boardroom decision making process.