A lot of smart people will tell you that if you want to truly gauge an economy, you need to talk to the business executives who are living and breathing it every day. They’ll give you a feel for what’s really going on in a country’s economic trenches.
So when those private-sector decision-makers are feverishly retyping their own résumés, that’s a pretty good sign that something’s amiss. This is what’s happening now in the United States.
A new report from outplacement firm Challenger, Gray & Christmas Inc., a leading source for employee and executive turnover data, showed that departures of chief executive officers at U.S.-based companies in the first eight months of the year were the highest in the 17 years that Challenger has tracked these numbers.
What’s most disconcerting about these numbers is that the previous record for U.S. CEO departures over the first eight months of a year was in 2008. Those numbers, we now know, signalled the start of the deepest U.S. recession in more than 70 years. This year’s numbers are worse.
If CEO departures are a canary in the economic coal mine, then they are indicating pretty loudly that it’s time to run for your lives. The tipping point from expansion to recession may be at hand.
In fairness, that is a significant “if." The Challenger CEO Turnover Report has, in its entire history, only fully captured one recession (albeit a biggie). That’s not enough to say for sure whether it accurately predicts economic downturns. Nevertheless, the unprecedented spate of CEO exits is strongly suggestive of a turning point for American business – which, logic and the 2008 experience suggest, likely also means a turning point in the economic cycle.
“With growing uncertainty surrounding global business and market strength, the fact that so many companies are choosing this moment to find new leadership is no coincidence,” said Andrew Challenger, vice-president at Challenger, Gray & Christmas, in a news release.
The Challenger report coincides with a survey of chief financial officers, from accounting and consulting firm Deloitte, that found that sentiment about the North American economy is at a six-year low. At the same time, their expectations for profit growth are fading. So while CEOs are heading out the doors (and/or being pushed out) in unprecedented numbers, the people who hold corporate purse strings have become increasingly pessimistic about the outlook for their own bottom lines.
Business sentiment is a pretty critical indicator for any economy. First, senior business leaders experience slowing demand in the marketplace in real time; if business is taking a turn for the worse, they typically see it in their order books and hear it from their clients long before such slowdowns surface in broader economic data. Second, fading sentiment among business managers feeds into their business decisions; they scale back hiring and spending in keeping with their more pessimistic expectations, which further weighs on the economy.
This is why central banks pay considerable attention to business surveys; they can often signal changes in economic momentum earlier than the economic data, which by its nature looks at past economic activity – months and quarters that have already come and gone. The Bank of Canada has its quarterly Business Outlook Survey; the U.S. Federal Reserve leans on its eight-times-a-year Beige Book.
The evident turn in U.S. business sentiment signalled by the Challenger and Deloitte reports is consistent with some other recent signs that the mood among business leaders is growing darker.
The Institute for Supply Management Purchasing Managers’ Index (PMI) dipped below its midpoint of 50 for the first time in three years last month, which indicates that purchasing managers at U.S. businesses are reducing their buying of manufactured goods. The latest small-business sentiment survey from the National Federation of Independent Business showed a worrying slump in year-over-year capital spending intentions. Non-residential investment in structures and equipment fell in the second quarter, its first decline in more than three years.
We can assume the Fed has been paying attention to the growing indications of a shifting mood, even if the Beige Book has so far shown only the slightest hints of worry. The signs of a sentiment turn were almost certainly fed into its decision to cut interest rates in July, and will further justify another rate cut that is widely expected at its next rate-setting meeting next week.
The same can’t be said of investors in the U.S. investors, who are once again pushing the stock market toward record highs. For them, the surging CEO departures should send a particularly strong warning. There is a tide turning here, and the people at the top clearly know it.