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Business Outlook Survey

CFOs are retrenching as the United States enters what could be a lengthy recession.
Kate O'Sullivan, CFO Magazine
April 1, 2008

After months of steady decline, the economic outlook can now only be described as bleak. Speaking at CFO's annual CFO Rising conference last month, veteran finance chief Jerry York said, "It's going to be a very bad recession, perhaps the worst I've seen in the 46 years I've been working." A majority of finance chiefs are similarly gloomy.

Optimism among finance executives reached a new low in this quarter's Duke University/CFO magazine Global Business Outlook Survey, with 72 percent of CFOs more pessimistic about the economy than they were last quarter and only 8 percent more optimistic. Pessimists outnumber optimists nine to one. CFOs also expressed less optimism about their own companies than ever before.

More than half of finance executives say the United States is now in a recession, and another quarter say the country will be in recession by the end of the year. Nearly 90 percent say the economy will not return to normal growth conditions until late 2009. Should a recession last until the second half of next year, it would be the longest such downturn since the late 1970s — dramatically longer than the dips in the early 1990s and in 2001, each of which lasted just eight months.

As a result of this economic uncertainty, 60 percent of CFOs have postponed expansion plans. They say capital spending will grow by just 3 percent this year, which economists consider maintenance-level. Hiring will increase by less than 1 percent. Even technology spending, which had remained fairly healthy as other purchasing slowed in recent quarters, will grow only modestly.

Credit conditions have directly hurt 35 percent of companies, and finance executives are worried about the impact of the credit crunch throughout the supply chain, fearing that business and consumer customers as well as suppliers could face difficulties. Thus far, the Federal Reserve Board's actions to cut interest rates have failed to help most companies.

"It's not good when good businesses can't get credit," says Jim Frates, CFO and treasurer at biotech firm Alkermes, based in Cambridge, Massachusetts. "I think every company is keeping a careful eye on its cash balance." In biotech, says Frates, this means some smaller firms won't be able to pursue as many new projects as they would like. "Companies are going to be conserving resources," he says. "Even exciting projects could be pushed out 24 to 36 months."

Concern about inflation is further dampening the mood of CFOs this spring. Faced with rising costs for commodities ranging from oil to wheat, finance executives say they plan to raise prices by 3 percent over the course of the next year, above the Fed's target of 2 percent.

"I feel worse than I did three months ago because of inflation concerns," says Bruce McDonald, CFO at Johnson Controls, the $36 billion diversified manufacturer and services provider based in Milwaukee. "I see a real ramp-up in commodity inflation, and Corporate America is just going to have to pass that cost on to the customer." McDonald notes that commodity price increases have come in waves over the past few years, with steel, copper, and chemicals all climbing.

There were two relatively bright spots in this quarter's results, however. First, for some companies, the weak dollar has buffered the impact of diminishing U.S. demand, as the falling greenback has buoyed exports. Eighty-six percent of companies with foreign sales say the declining dollar has helped them by accelerating their business overseas.

Second, CFOs expect to continue to pursue mergers and acquisitions. Thirty-seven percent say they plan to buy a company or part of a company in the coming year. For businesses with healthy balance sheets, the weak market should provide plenty of buying opportunities.

In Europe, finance executives are nearly as dour as their U.S. counterparts, with 60 percent more pessimistic about their countries' economies than they were last quarter. CFOs in Asia also became dramatically more pessimistic about their region this quarter. Seventy percent of them say the United States is currently in a recession, and half expect a significant negative impact on their earnings as a result. Nonetheless, Asia's finance executives continue to be more optimistic than their U.S. and European peers.

Kate O'Sullivan is a senior writer at CFO.


The Way Forward

At the CFO Rising conference in Orlando last month, we asked CFOs what the next U.S. President could do to spur economic growth. Here are some of their suggestions:


Economic optimism; expected U.S. company growth; U.S. recession; return of normal economic growth


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