April 7, 2009 - Most CEO's expect things to get worse. Chief Executive Officers of major U.S. corporations were more pessimistic than three months ago about their business and the economy over the next six months, the Business Roundtable reported last Tuesday. The CEO confidence index fell to negative 5.0 in the first quarter from 16.8 in the fourth quarter. It was at 79.5 a year ago. The CEOs expect the economy to contract 1.9% in 2009. Over the next six months, about two-thirds of CEOs expect lower sales, lower capital spending and fewer jobs at their company. About a quarter expect sales to rise in the next six months, while less than 10% expect to increase hiring or capital spending.

That's because when CEO's think only the worst can happen, they start doing things, like cutting employees, ad campaigns, travel, expansion plans, hiring, buying new equipment, anything and everything to bring down costs. Corporate America is getting leaner with the intention of getting more so. If CEO's are right, they'll be able to exist through the worst economic times since the Depression. If they're wrong, profits will come quickly to the bottom line.

Companies that are overly cautious with their costs may lose some sales because of too few employees to handle new orders. But on the orders they fill, profits will be larger than normal. And managers will want to see a continuous string of orders before they start hiring or expanding marketing budgets. Hiring new people is almost always the last things companies do because of the expense and if new activity is short lived, the new hires have to be let go quickly, another expense. When the economy starts lifting, look for good to great earnings, especially compared to this year's or last year's same quarter. Comparisons will be extremely encouraging.

Most of these companies aren't getting any of the bail-out money from the federal government. While many are in a crisis mode, most aren't big enough to make a difference one way or the other on total employment or the confidence needed for financial institutions to survive. They're really the backbone of the U.S. economy. And they're preparing for whatever is coming, ready for the worst and hoping for the best. As they make the necessary cuts, their companies are more efficient, an efficiency that will drive big profits when the economy lifts.

That's good news for investors.

- Ted Allrich