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CEO Daily: Wednesday, 24th May

Good morning.

Lots of skepticism this morning about the Trump administration’s assumption that it can achieve 3% annual growth—rather than the 1.9% assumed by the Congressional Budge Office. That growth assumption is critical to making the budget work, generating an additional $2.1 trillion in revenue over the next ten years.

Budget Director Mick Mulvaney said the forecast was compiled by himself, economic adviser Gary Cohn, and Treasury Secretary Mnuchin, based on their belief that higher growth will result from administration policies on taxes, regulatory relief and health care repeal—all of which should help raise the productivity of American workers.

That’s a big leap of faith—but one some might be willing to make, were it not for the fact that the administration is counting on the very same growth dividend to fund its tax plan (and also assuming this outsized growth won’t lead to higher interest rates.) That’s hardly the first time an administration has resorted to gimmicks to make its budget math work, but may take the cake for size and audacity.

Meanwhile, for those who live on this side of the looking glass, speculation is increasing about when the next recession will hit. Goldman Sachs—former employer of both Cohn and Mnuchin—predicts there’s a 31% chance of a recession in the next nine quarters. If one doesn’t hit, this recovery will become the longest on record. A separate effort using artificial intelligence predicts March 2019 as the start date for the next recession.

Apologies for a couple of sleep-deprived missteps yesterday morning. I referred to electric engines—should have been motors. And Tom cited budget savings of 3.5 “billion,” rather than trillion.

More news below.

Alan Murray

Top News

Moody’s cuts rating on China’s debt

Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. The firm cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances when outlining the case for the downgrade (it also changed the outlook to stable from negative). “It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. China’s Ministry of Finance called the downgrade “absolutely groundless” and complained the rating company underestimated the capability of the government to deepen reform and boost demand. Bloomberg

Target settles data breach lawsuits

Big-box retailer Target reached an $18.5 million settlement with 47 states and the District of Columbia over a massive data breach in late 2013. The settlement is related to one of the biggest data breaches to hit a U.S. retailer, as Target had reported that hackers had stolen data from up to 40 million credit and debit cards of shoppers who visited its stores during the 2013 holiday season. Importantly, the costs tied to the settlement are already reflected in the data breach liability reserves that Target previously disclosed. Reuters

U.S. sues Fiat Chrysler over diesel engines

The Justice Department filed a lawsuit against Fiat Chrysler Automobiles for allegedly building and selling diesel engines that violated pollution standards. The federal government alleges 104,000 Ram pickup trucks and Jeep Grand Cherokee sport-utility vehicles contain software that violates U.S. emissions tests for diesels. The matter erupted in January when the Environmental Protection Agency accused Fiat Chrysler of possible violations, whereafter CEO Sergio Marchionne accused the agency of “smoking illegal material” for making bogus allegations. The lawsuit comes after months of negotiations between the Italian-American automaker, the EPA, and other regulators, with the company as recent as last week proposing a software fix that it hoped would help avert a legal battle. But the federal government is now saying vehicle emissions are “much higher than the EPA-compliant level” in real-world use. USA Today

IKEA has a new CEO

IKEA has picked company veteran Jesper Brodin to be its new chief executive, replacing Peter Agnefjall who will leave the company. The furniture group said Brodin, currently head of IKEA of Sweden and responsible for development of the product range and supply chain, will take over on Sept 1. He will steer the company as it steps up efforts to expand online and try different store formats to try to address changing shopper expectations. Agnefjall, who became CEO in 2013, is taking some time off to be with his family before embarking on his next venture. Reuters

Around the Water Cooler

Coach thinks outside the bag

Three years ago, Coach was hemorrhaging market share, suffering the effects of a discount-fueled expansion that tarnished its brand and drove customers away. To revive the company, Coach CEO Victor Luis essentially launched a campaign to recover its 20th-century mystique. He purposefully shrank the business and repositioned Coach as a smaller, healthier retailer, prioritizing quality over mass-market quantity. And while Coach’s North American revenue fell by double-digit percentages in its fiscal 2014 and 2015 years, the company has now reported four straight quarters of North American comparable store sales growth. Total sales are on track to increase for a second year in a row in fiscal 2017, to $4.5 billion. “This company is materially healthier than it was two, three years ago,” says Craig Johnson of Customer Growth Partners, a retail consultancy. Fortune

Apple names new diversity officer

Apple has named Denise Young Smith vice president for Inclusion and Diversity, marking the company’s latest effort to improve racial and gender disparities among its employees. Young Smith, formerly the company’s global head of human resources, will take over diversity initiatives and report directly to Apple CEO Tim Cook. She takes over for Jeffrey Siminoff, who left the company for Twitter. The change comes after pressure from shareholders over the lack of diversity of the company’s senior management and board at the annual meeting in February. Fortune

Uber to repay NYC drivers

Uber, which currently has more than 50,000 drivers in New York, admitted that “tens of thousands” of drivers were impacted by a calculation glitch that goes back to November 2014 and said that, on average, drivers would get about $900 including interest. The woes are related to Uber’s incorrect calculation of the commission it takes from New York City drivers after each ride. A 2014 pact had mandated Uber calculate its cut based on the ride’s net fare, but instead the ride-hailing startup had been basing commissions on gross fare (which includes taxes and fees and therefore led to a larger cut than Uber was entitled to). CNNMoney

Summaries by John Kell; @johnnerkell