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With consumer demand weak, fuel and labor costs rising, and the credit markets in turmoil, finance chiefs predict a recession and call on the Fed for help.
Alan Rappeport, CFO.com | US
December 5, 2007
The credit crisis and the falling dollar have sullied the moods of finance chiefs over the past few months, with their optimism about the U.S. economy falling to a record low in the latest Duke University/CFO Magazine Business Outlook Survey. Many are calling for the Federal Reserve to cut interest rates again.
The final results for the 2007 survey of 573 CFOs in the U.S. and 1,275 globally found that 72 percent of CFOs are more pessimistic than they were in the previous quarter. Meanwhile, just 9 percent were more optimistic. Since its inception six years ago, the survey's optimism index has never been lower.
"CFO optimism is spiraling downward, surpassing the record low for optimism set last quarter," said John Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business. "This is dramatic because CFOs have a track record of accurately predicting future economic activity, and their predictions run one or two months ahead of other common economic indicators."
The gloomy outlook has been depressed especially by growing concern about weak consumer demand, rising fuel and labor costs, and turmoil in the credit markets. Such an outlook will likely slow growth in earnings, capital spending, and hiring, the report said.
Concern about the credit markets indicates the potential of problems in the subprime mortgage sector to seep into other parts of the economy. Among the CFOs polled, nearly a third say their companies have been directly impacted by recent unrest in the credit markets. Of those firms, 47.6 percent say that they have faced more costly credit, while 49 percent say credit has become less available. Furthermore, a third of those firms intend to reduce capital spending and a quarter of them will reduce hiring plans in response to the credit squeeze. Nearly 40 percent of CFOs believe a recession will begin in 2008.
In the face of such pessimism, CFOs are hoping for help from the Fed. The survey finds that CFOs by a two-to-one margin are hoping for 25 basis point rate cut at the Federal Open Market Committee meeting on December 11.
"If you believe a recession is imminent, you become very conservative in both capital spending and employment plans," said Duke professor Campbell Harvey, founding director of the survey. "You go into defensive mode."
However, the report contends that CFOs are also concerned about the impact that further rate cuts will have on the already weak dollar. The depreciating currency has hurt nearly a third of companies due to the increased cost of raw materials, according to the report.
But the weak dollar is not always bad news for CFOs, especially those doing business abroad. Nearly half of companies that do a quarter or more of their business abroad say the weaker dollar has helped their firms, making exports cheaper and more competitive overseas. What's more, 80 percent of multinational U.S. firms say that profits from their foreign divisions are helping to make up for the slowdown in the domestic economy.
Outside of the U.S. the sentiments of CFOs are more varied. In Europe, 56 percent of finance chiefs have grown more pessimistic about their countries compared to the previous quarter. Contributing to those sentiments are expectations that employment in Europe will fall by 0.3 percent. A skilled labor shortage, weak consumer demand and the cost of fuel are other top concerns. The ailing credit markets have not spared Europe, as a third of companies there say they have been negatively affected by credit problems.
CFOs in Asia are more optimistic than their counterparts in Europe and the U.S. In the last quarter 62 percent of CFOs at Asian multinational firms are more optimistic than in the quarter before. Domestic employment is expected to increase by 9 percent in 2008 and capital spending is expected to grow by 11 percent. However, 34 percent of Asian CFOs think that economic growth in China is unsustainable or will be unsustainable soon.
In China optimism has declined slightly regarding prospects for the country's future pace of economic growth, but its overall optimism is on par with the rest of Asia. Chinese firms are less enthusiastic about America's prospects. Political backlash in the U.S. after previous takeover attempts has made 16 percent of Chinese CFOs less interested in acquiring American firms in the future. And while 61 percent of Chinese companies say that a U.S. recession would hurt them, the survey said, just 9 percent say it would hurt a great deal.