It isn’t war in the Middle East, nuclear weapons, or the threat of a Chinese takeover of Taiwan. In a challenging global environment, it turns out the biggest worry keeping top U.S. executives up at night isn’t actually global at all.
U.S. CEOs rank surging U.S. debt and deficits as the biggest geopolitical risks to their business operations, a new survey by the Conference Board finds.
That revelation underscores the central importance of U.S. debt markets to the health of business as the economy continues to adjust to the Federal Reserve’s rapid interest rate increases in 2022 and 2023. While the S&P 500 managed to produce double-digit returns last year despite two major wars and other global tensions, executives are signaling that the fate of even the strongest businesses is tied to an unstable U.S. political system. Too much federal debt could weigh on growth, exacerbate inflation, and limit the ability of the federal government to respond to new crises.
The national debt is at a record $34 trillion, or more than 120% of gross domestic product, a level rarely seen outside of peacetime. Last year’s federal deficit ran to $1.7 trillion, an increase of 23% over the year before. That rise reflected lower tax receipts, due in part to the stock market decline in 2022, and rising spending.
Lawmakers have made tentative progress in recent days on a new federal budget. That would keep the lights on, but there is little prospect of meaningful deficit reduction during this presidential election year. Without changes, the Congressional Budget Office forecasts that debt will hit 181% of GDP in the coming decades.
“The debt issues may be a flashpoint signaling concerns about government in general in the U.S.,” said Dana Peterson, chief economist of the Conference Board, a business-focused think tank.
The Conference Board surveyed 1,247 global executives in late 2023, including 630 CEOs. The board’s researchers discussed the findings with Barron’s ahead of the survey’s publication Wednesday. The survey also found that “most CEOs in the U.S. are still bracing for a recession,” and that only about a third believe their organizations are ready for one.
Many in the federal government seemed to work overtime last year to try to spook the markets. The House of Representatives waited until the last moment to raise the debt ceiling and deposed its own speaker over a budget that’s still pending. In the fall, bond traders demanded higher yields as the Treasury Department moved to issue all that new debt, raising fears that there may not be enough buyers for new issuance.
Business leaders have seen the cost of capital rise significantly in recent years as interest rates have risen. Net federal interest expenses are starting to rival defense spending and other fixtures of federal policy. The vast quantity of high-yielding government debt risks crowding out private investment, which could worsen inflation. All that, plus the political drama of the past several months, means that it’s perhaps no surprise that CEOs are focused on the national debt.
To be sure, it isn’t new for business leaders to worry about federal debt. And despite the political turmoil and downgrades of U.S. debt by ratings firms, the market for U.S. debt remains large and liquid.
But that doesn’t mean CEOs are wrong to worry, said Roger W. Ferguson, himself a former CEO—of retirement manager TIAA—and a former vice chair of the Federal Reserve. “CEOs are also paid to think about emerging risk,” he said. U.S. debt is probably not an imminent threat to business operations. “But I think it’s chronic, with an aging population and with defense spending likely to go up. There are very few places for us to cut back, and none of them really matter,” he said.
It’s up to markets to decide the cost of government debt. The 10-year Treasury yield flirted with 5% in October before falling. The question CEOs are implicitly raising is how long rates can stay relatively benign, Ferguson said. “All of that depends very much on the kind of credibility that we have here in the U.S. in terms of our ability to run our economy in a way that makes it highly productive,” he said.
“We always think of checks and balances within the government,” Ferguson said. But they exist in the markets, too. Interest rates are an example, he said. “And there are checks and balances that exist among the leadership classes, where the private sector leaders, in this case CEOs, can express a degree of concern.”
In other words, even though markets aren’t acting as if there’s an imminent threat, and politicians certainly aren’t, business leaders are starting to put their hands up and say that there’s still something important to worry about. And when that message comes from executives who’ve managed their businesses through Covid, Ukraine, Hamas, and beyond, it’s one that’s worth thinking seriously about.
Write to Matt Peterson at [email protected]
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