Do you think the third-quarter numbers for corporate earnings and gross domestic product are largely irrelevant in terms of signaling recovery?
No, they're relevant in terms of showing that we've made progress. Unemployment is not rising as fast, even though it is still rising. Some businesses are seeing a little pickup. Certainly the auto industry did a little better in the third quarter. But profits tend to be a leading indicator because they're one of the first things to change. Businesses react to the change in profits. Suddenly they're selling more; they're able to get a better price than they expected, and that motivates them to start changing their behavior, to stop cutting orders or order a little more. In this case, we do have a certain inertia. The only thing we can point to is that inventory investment, which has been substantially negative, can't continue to be that negative. As it comes up, that's a positive. You have to produce more to meet the same level of demand even if demand doesn't grow.

Many people think we're then going to get into a positive inventory cycle, but we [at the Levy Forecasting Center] disagree. Part of the reason this inventory decline has been so severe is that there has been a secular change. What's happened in the past year or so has made a lot of companies change their attitudes about the relative risk of stocking out or having too narrow a line of merchandise or supplies compared with the carrying costs, and tying up cash that they might need in an emergency or using too much of their credit lines.

Some CFOs have told us recently that they're eager to seize opportunities as the economy starts to recover. They're thinking about making investments that they've been putting off. Do you have any advice for them?
This is still a period where one has to be very cautious. We don't think this recovery is going to have much zip as we go into the new year. Profits look like they're going to stall a bit.

My advice is to be very guarded about your financial position. It's worth paying a bit of a penalty to protect your access to cash and maintain liquidity. As for expansion, obviously if it's something you need [to do to stay competitive] you may have a compelling argument. But if it's a matter of taking advantage of a pickup in sales, I would err on the side of undershooting, because the downside risks remain huge. One thing we've learned over the past couple of years is that the kinds of problems we're dealing with can escalate in unexpected ways and do a great deal of damage. There will come a time to start looking at long-term expansion, but I would not be looking that way right now.

David Levy will be speaking at the CFO Rising Conference in March 2010 in Orlando. For more information, see http://www.cfo.com/conferences/.

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