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Waiting for a Sign

CFOs are feeling much better than they were last quarter, but their plans still reflect plenty of caution.
Kate O'Sullivan, CFO Magazine
July 15, 2009

Adrift in a sea of conflicting economic indicators, CFOs are sending mixed signals in this quarter's Duke University/CFO Magazine Global Business Outlook Survey. While they report a marked increase in optimism compared with last quarter, they still plan to lay off employees and cut spending. Fifty-four percent of U.S. finance chiefs are more optimistic than they were last quarter, when optimism levels were near the historic low reached in the fourth quarter of 2008. Positive sentiment among Asia and China's finance executives also rebounded this quarter, though Europe's CFOs remain more pessimistic than their global counterparts.

This improved outlook has yet to affect CFOs' plans for their own businesses, however. On average, they expect to reduce their workforces by 6% in the next 12 months, which could send unemployment as high as 12%. Finance executives expect earnings to decline by 6%, and will reduce capital spending by 12%.

How to explain the gap between CFOs' outlook and their cost-cutting plans? It could be that finance chiefs aren't yet ready to act on their more positive outlook. Improved optimism has typically been a leading indicator, showing a positive trend ahead of other fundamentals, says John Graham, finance professor at Duke's Fuqua School of Business and the director of the survey.

CFOs who are more optimistic about their domestic or regional economy compared with last quarter

CFOs' responses also reflect the mixed economic data of recent months. Home construction exceeded expectations in May, but inventories of unsold homes remain high. Core producer prices declined in the spring, but oil prices have surged. The number of monthly job losses has slowed, but the average length of unemployment has reached its highest level since the Bureau of Labor Statistics began gathering such data. "I think the worst is behind us, but I'm still not sure when it's going to be over," says Steven Graham, finance chief at Prospect Enterprises, summing up the prevailing mood.

Although CFOs feel better than they did three months ago, they are waiting for proof that business is truly improving. "It's one thing to be optimistic; it's another thing to get out over your skis in terms of spending," says Michael Provenzano, finance chief at Aspect, a communications software and services provider that counts many distressed global banks among its customers. "I'd love to be loosening up spending in the second half of the year, but that's only going to happen after I see the performance on the revenue front." Provenzano says many customers "are realizing that it's not the end of the world" and are moving forward with carefully vetted projects.

Thomas Carlson, CFO at Advance Food Co., a food processor, says his company is poised to have its best year ever by a significant margin, thanks to a highly efficient new plant. But he is still hesitant. "We have every reason to be optimistic, and yet…I really think we're probably going to see things get a little bit worse for our customers, and therefore for us, before things get better." Carlson worries that continuing unemployment will limit dining out, hurting the largest component of his customers' business.

Some CFOs say they are cutting back as part of the normal course of business. At Hometown America, an owner and operator of manufactured housing communities, finance chief Tom Curatolo is having a surprisingly good year at a business that is poised in a relatively inexpensive segment of the housing market. The company is turning a profit and is ahead of plan, yet Curatolo says he will cut capital spending by about 5%. He says the firm has overspent in the past on infrastructure in its communities. "Even if the economy were booming, we'd be cutting our capital spending," he says.

Wait 'til Next Year
The uptick in optimism could indicate that the economy is bottoming out and will improve in 2010, Duke's Graham says. More than a third of the 540 senior finance executives who responded to the survey say the recovery will begin in the second half of this year, while 30% are looking to the first half of 2010. Another 20% don't expect the economy to begin to pick up until later next year.

The credit crisis continues to hinder recovery, with 62% of companies at least somewhat affected by increased cost or reduced availability of credit. Firms with credit ratings of B or lower have been most severely affected, with 80% of them feeling at least some impact. Among those with good credit, however, the market tightness has eased somewhat; nearly 40% say conditions have improved since the end of 2008.

Whether CFOs' optimistic outlooks or pessimistic plans carry the day remains to be seen. Until employment improves, growth will be muted at best, but at least finance executives see hints of recovery.

Of course, what recovery looks like is another difficult question. "When the economy does turn, what's it going to turn back to be?" asks Prospect Enterprises's Graham. "I don't think it will ever be what it was, but what will the new normal be? And can we get there quicker than everyone else?"


Kate O'Sullivan is a senior writer at CFO.


Q2 2009 Business Outlook Survey Results


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