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CFO optimism returns to prerecession levels.
Kate O'Sullivan, CFO Magazine
April 1, 2011
Although CFOs are still cautious, their optimism has grown since last quarter, climbing back to 2007 levels, according to the most recent Duke University/CFO Magazine Global Business Outlook Survey.
Now in its 60th consecutive quarter, the survey also finds finance chiefs expecting to increase earnings by double digits and boost spending in several key categories over the next year. The uptick in optimism is good news for the economy overall, as the survey has historically shown that an increase in CFO optimism signals stronger GDP growth, spending, and employment within a year, according to John Graham, professor of finance at Duke's Fuqua School of Business and director of the survey.
Fifty-six percent of finance chiefs in the United States say they are more optimistic about the economy than they were last quarter, up from 50% in December. They plan to increase capital spending by 12% on average over the next 12 months, a robust rise that marks the highest level of capital-spending growth since 2004. CFOs say spending on technology will increase by 6%, research-and-development spending will rise 4%, and marketing and advertising outlays will also grow by 4%.
Al Blazek, finance chief at Dunham's Sports, a midwestern sporting-goods retailer with stores in 13 states, says he is "reasonably optimistic" about the future. "It seems like people are pushing away from more-expensive purchases, which could be a negative for places that sell very expensive things but has given us a lift," he says. "We have gotten some new customers who might not have crossed the threshold before."
At Douglas Machine, a manufacturer based in Minnesota, CFO Tom Wosepka says he is more confident about his company's outlook than about the economy in general, but that he expects "continued relatively modest growth" in the United States, with more opportunities for faster growth in emerging markets. Douglas Machine, which makes capital equipment used in packaging consumer goods, recently expanded into a new end market — making equipment used by biotech firms. The move has accelerated the company's growth, says Wosepka.
The Missing Ingredient
Still, despite growth expectations and strongly rebounding earnings, CFOs remain reluctant to hire. On average, they plan to increase their domestic full-time workforce by just over 1% in the next year. Finance chiefs in the transportation and energy sectors will do more hiring, expanding their staffs by nearly 5% on average, while communications and media firms and mining and construction companies continue to plan layoffs.
Retailers will increase their workforces by 3% on average, a number that Blazek says makes sense, given the depth of the cuts many retailers made during the recession. "So many retailers have been running for so long with skeleton crews that there were sales left on the table as a result," he says.
Bill Helenberg, finance chief at Precision Machine Works, a maker of aerospace parts, says the company is "trying to avoid massive hiring," making do instead with adding overtime as needed and working as efficiently as possible. "There's no point in building up your production workforce when there's so much uncertainty out there," says Helenberg.
Indeed, certain skill sets are in demand, even as overall hiring remains weak. Finance executives say their companies are seeking skilled and professional workers above all, followed by salespeople, engineers, and product-development staff. Wosepka says Douglas Machine has been continually trying to hire staff ranging from machinists to genetic scientists. The task has been challenging, in part because of the company's suburban location, where the hiring pool is small, he says, and because demand for such workers is intensifying.
Nearly 40% of CFOs say their workforces have returned to prerecession levels, but a fifth say their staffs will never again reach that size. The remainder say they will get there eventually, but not without significant revenue growth.
Consumer demand once again tops the list of external, macroeconomic concerns, while the ability to maintain margins is the top company-specific concern. Many CFOs faced with rising input costs are finding that continued soft demand limits their ability to pass along price increases, resulting in a squeeze on margins. In industries that were hard-hit by the recession, scrambling competitors also make pricing a challenge. "We've seen some competitors get really hungry," says Wosepka. "Unfortunately, when you have desperate competitors, it does not help your ability to price."
CFOs are growing more worried about inflation, citing the cost of fuel and the cost of nonfuel commodities among their top concerns. They expect to increase their prices by just 2% on average over the next 12 months, however, in part due to the pricing pressure described by Wosepka.
"Inflation is a concern from a long-range perspective," says Blazek, who adds that his business has witnessed the skyrocketing price of cotton. "But in the short run, there are just too many dampening activities out there to have inflation get out of control."
Kate O'Sullivan is a deputy editor of CFO.