Financial Week has an interesting article called It’s official—CEOs are worried.

According to the latest survey of CEOs conducted by the Conference Board, inflation concerns and credit market uncertainties have chief executives predicting that it will be tough to maintain profitability for the first half of the year.

The board’s measure of CEO confidence fell to 39 in the fourth quarter of 2007, down from 44 in the third quarter. The last time the index fell below 40 was in the final quarter of 2000, back when the U.S. was entering recession. A reading of more than 50 points reflects more positive than negative responses.

Although CEOs said that they’re seeing some price increases from their suppliers, in general they have been reluctant to pass on any significant price increases to their customers, she said. According to the survey, the majority of CEOs expect changes in their businesses’ selling prices in 2008, but just 9% are anticipating price increases in excess of 10%. More ominously, about 13% said they plan price decreases and 4% foresee no change.

Survey Highlights

  • Chief executives’ confidence in the U.S. economy has dropped to a seven-year low.
  • Only 16% of the CEOs surveyed said they expected general economic conditions to improve over the first half of the year.
  • Only 17% anticipate any improvement during the next six months or so in their own industry.

CEOs Reluctant to Hire or Raise Prices

It’s quite clear CEOs cannot pass along all input price hikes. Reluctance to hire is a key point as well. This is a significant change in psychology and that change is now casting a wide deflationary net. Those without jobs will not be able to pay bills.

The consumer squeeze continues and price increases will be hard to hide.

Some merchants are already cutting prices to try to lure buyers. Williams-Sonoma (WSM), the U.S. gourmet-cookware retailer, yesterday reduced its fourth-quarter profit forecast following an unexpected decline in holiday sales. Management at the company said it has marked down merchandise and offered cheaper shipping at its Pottery Barn. This year may be “increasingly challenging,” CEO Howard Lester noted.

Those manufacturers facing less price-sensitive demand are trying to pass rising costs to consumers. General Mills (GIS), the second-largest U.S. cereal maker, this week said it expects to raise prices later this year to recover higher dairy and wheat costs. The company raised prices on such products as Yoplait yogurt and Pillsbury refrigerated dough on Nov. 1 following increases earlier in the year.

Same Old Story

There is absolutely no pricing power in things we want but do not need. However, there is still pricing power on things like food and energy we absolutely need. It’s not a very good environment for cash strapped consumers. Nor is it a good environment for CEOs that overexpanded during the boom.

CEOs and consumers alike have solid reasons to be worried about what lies ahead. The big difference is that CEOs have golden parachutes, while cash strapped consumers have nothing but debt to show for five years of artificial boom.

Mike “Mish” Shedlock
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