Debt reduction talks inspire optimism in corporate America about recovery

The debt-reduction talks in Washington are boosting optimism in corporate America about the economy. 

Chief executive officers of some of the nation’s largest companies believe important structural changes could emerge from the talks, led by Vice President Biden, that could boost hiring and business spending this year and beyond. 

The positive assessment is a bit of a surprise amid the gloom and doom of daily economic reports over the past few weeks, as well as the gridlock over congressional negotiations on spending and taxes. 

But the CEO optimism mirrors comments from participants in the Biden talks, who have kept quiet about the specifics of their discussions while building trust by complimenting the seriousness of the high-stakes negotiations. 

Statements from Biden and Republicans including House Majority Leader Eric Cantor (Va.) have created the sense that adults are in charge of the debt talks, and that both sides agree a deal must be hammered out by the Aug. 2 deadline set by the Treasury Department. 

A Business Roundtable survey of CEOs released this week found 87 percent expect their sales to increase the rest of the year, while more than half expect hiring and investments in capital purchases to increase in the second half of 2011.

The group’s leaders see the debt talks as an opportunity to improve the climate for business, and a reason to think the economy will strengthen this fall. 

“The way BRT people look at it, it has raised expectations that there will be progress in this area,” said Business Roundtable Chairman Ivan Seidenberg, who is also the CEO and chairman of Verizon Communications. “CEOs generally believe there will be progress in that direction.”

Mark Zandi, the chief economist for Moody’s Analytics, said a deal in talks to raise the debt ceiling would be a “real boost” that could lift the economy substantially. But if a deal is missed, he warned things could move in a negative direction quickly.

Business leaders closely watching the talks might be impressed by the sense of seriousness that has characterized the Biden-led negotiations. 

White House Budget Director Jack Lew said Tuesday evening that the fact that no one is publicly revealing details of the talks is a sign they are “good enough” to keep secret. He also said there is an “increasing definition” of what needs to be done.”

Biden in late May said the talks were on track to find $1 trillion in deficit cuts, providing an early boost of optimism. Cantor said he thought lawmakers could find more than $1 trillion in cuts, and this week complimented Biden’s leadership. 

It’s possible the CEOs are overconfident, though the Manpower Group, which measures employers’ workforce plans, also expects hiring to pick up this fall. It found employers in all 50 states intend to boost hiring and that employers in 42 states anticipate “considerable increases.”

“Although employers are not signaling dramatic upswings in hiring plans, there does seem to be hiring energy developing based on sustained year-over-year growth,” Jonas Prising, the president of Manpower Group of the Americas, said in a statement. 

There are certainly reasons to fear a significant dip in the economy. 

The housing market in the U.S. is continuing to fall, putting a hurt on the construction industry and consumers. Fuel prices have fallen, but are still crimping consumer spending, and perhaps account in part for this week’s drop in retail sales. 

Most expect the economy to grow this fall, but forecasts have been cut back. 

A Reuters poll of 70 economists found that most expect the economy to grow at a 2.5 percent rate in the second quarter, with growth moving above 3 percent in the third and fourth quarters of this year. This is down from a prediction in the previous month’s poll of 3.3 percent growth in the second quarter. 

Much will be decided in the next two weeks, which Lew called critical for a deal. 

If Congress and the White House reach an agreement, they could send a signal to markets that the U.S. political system still functions, and that the nation is not headed toward fiscal doom. That would prove the optimism of corporate America spot-on.

If they do not, the economy will likely slow, and comparisons between the U.S. and Greece will reverberate.