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The Long and Grinding Road

Modest signs of recovery emerge, along with more signals of distress.
Kate O'Sullivan, CFO Magazine
February 1, 2010

Optimism continues to increase among finance executives, but don't pop the champagne corks just yet. This quarter's Duke University/CFO Magazine Global Business Outlook Survey, which polled 567 finance chiefs in the United States, found that 48% are more optimistic about the economy than they were last quarter, and they've started to loosen the purse strings slightly on a number of key budget items such as capital spending, research and development, and advertising and marketing. Public-company respondents predict their earnings will increase by 8% in the next 12 months, a marked increase from a year ago when they anticipated a 9% decline.

But these promising signs are accompanied by distressing signals, notably regarding the workforce and the credit markets, that indicate that any improvement will be slow. Amid the worst of the financial crisis and recession last year, management teams slashed their workforces and cut hours, benefits, and wages, moves that will not be reversed this year at most companies. Indeed, more layoffs are in the works, with finance chiefs predicting an average reduction in staff of just over 1% and more than half saying that staffing will not return to prerecession levels for two years or more.

CFOs recognize the potential consequences of these actions: nearly 50% say their companies took steps in the last 20 months that could reduce their long-term growth prospects, including deep cuts in the workforce and reduced spending on training and professional development. It's no wonder that less than a third say employee morale is good or excellent, compared with the 77% who say morale reached those levels at year-end 2007.

With workers uneasy and the unemployed facing a protractedly dismal job market, the outlook for consumer spending remains bleak. "We're not too optimistic that we'll have a recovery in the first six months of the year," says Daniel Goldsmith, CFO at Hub International, an insurance broker based in Chicago. "Maybe on Wall Street, but not on Main Street." Goldsmith, who notes that Hub's clients are largely midsize businesses, says that many have fewer employees, lower sales, and less real estate to insure. "Our assessment is fairly positive, but there's going to be continued pressure," he says.

As the credit crunch stretches into a new year, limited access to capital also continues to stunt economic growth, with 43% of CFOs reporting that banks are less willing to lend to their companies than they were in summer 2008 (see "A Debt Deferred"). This lack of access to financing poses a problem not only for today's operations but also for tomorrow's expansion — and for the job market, as more than 40% of finance executives say restricted financing has caused their companies to pass up profitable opportunities, potentially dampening growth.

At smaller companies, credit concerns are more widespread, with nearly 50% of CFOs at companies with less than $500 million in annual revenue reporting that their banks are less willing to lend. Among all CFOs who have encountered reluctance at their banks, more-conservative lending standards, restrictive covenants, and high interest rates rank as the most significant obstacles.

CFOs' optimism about the economy and their companies' financial prospects

Bernhard Barth, finance chief for North and Central America at Demag Cranes and Components, a German provider of big-ticket heavy equipment, says that while "the sense of doom has lifted from the economy," the company's customers continue to delay or cancel purchases due to the unavailability of financing. However, he adds that Demag is fielding a lot of inquiries, in a sign that companies and governments are at least starting to think about reviving stalled projects.

"We've seen some stability in our business," says Jon Biro, finance chief at Consolidated Graphics, a commercial printing company based in Houston. "It's too early to say whether we've turned the corner, but we're no longer feeling like we're falling off a cliff." Despite what he calls "a depression" in the commercial printing sector, Biro says he sees opportunities to further consolidate the fragmented industry and gain market share during the recovery.

The problem for Consolidated Graphics, and for the economy as a whole, is that widespread uncertainty remains about when recovery will begin and, if it has indeed begun, how sustainable and robust it will be. "The implications of not knowing are that people tend to be very conservative," says Biro. "We're not hiring. We've cut salaries and wages, and we're not going to restore those cuts until we see a sign that business is growing."

There are stronger indicators of recovery in China and the rest of Asia, where finance chiefs are significantly more optimistic than their U.S. counterparts. Asia's CFOs expect to increase capital spending by 16%, boost employment by just under 5%, and increase earnings by more than 20%.

Europe's CFOs are slightly less optimistic than finance chiefs in the States, and they plan further layoffs. European companies will see earnings grow by 6% on average, but with continued reductions in spending on capital projects, IT, advertising, and marketing, the road to recovery looks bumpy there as well.


Kate O'Sullivan is senior editor for strategy at CFO.


Business Outlook Survey Results, January 2010


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