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Finance chiefs are much gloomier about the economy but do not expect another recession.
Kate O'Sullivan, CFO Magazine
October 1, 2011
Optimism among chief financial officers plummeted in this quarter's Duke University/CFO Magazine Global Business Outlook Survey, from an index of 57 out of 100 last quarter to 49 in early September. As weak demand and economic uncertainty continued to worry them, finance chiefs who had grown more pessimistic compared with last quarter outnumbered those who had become more optimistic by five to one.
"It's demand," says Kirk Hancock, finance chief at The North Highland Co., a global consulting firm based in Atlanta. "There's just lackluster demand for anything other than gold," which continues to rise, propelled by prolonged economic uncertainty.
While North Highland's business has continued to grow, Hancock sees a broader economy that is "muddling along," as executives are plagued by uncertainty at home and abroad. "Things are so complex and interconnected, I don't think anyone understands it. When you talk about the idea that the eurozone might collapse, no one has a scenario for that," he says.
Despite their gloomy outlook, the 494 U.S. finance chiefs surveyed do not predict a second recession. Sixty-four percent are moderately concerned, a little concerned, or not at all concerned about the possibility of the U.S. entering a recession within the next year. A quarter are very concerned, and 11% say the economy is already in recession.
CFOs' actions speak louder than their words, however. They continue to plan to increase their outlays in key spending areas, although by smaller amounts than they forecast last quarter. Capital spending, for example, will grow by 4.5% on average over the next 12 months, down from nearly 9% last quarter. Asked whether they had pushed back capital-spending plans during the past 3 months, 67% said no.
Technology spending will rise by just over 4% on average, down from 6%, and marketing and advertising spending will grow by 2%, also down slightly. Spending on research and development, however, will increase a bit more than predicted three months ago, at just under 3%. Inflation pressure has decreased slightly, as CFOs say their companies plan to raise prices by 2.5% this quarter, down from 2.9% last quarter.
A Messy Jobs Picture
Finance executives plan to increase their full-time domestic workforces by just under 1% on average. The number is slightly up from last quarter, but isn't large enough to make a dent in the unemployment rate. It will translate into about 100,000 new jobs per month.
Seventy-one percent of CFOs say they have not pushed back existing hiring plans amid the market volatility of the past three months. But 29% have delayed their plans, citing economic uncertainty, insufficient demand, and financial and credit constraints.
Indeed, comments from finance executives about their companies' different staffing situations reveal some of the varied and numerous factors depressing employment. For example, in some cases, even healthy companies are making layoffs as they change strategic direction. Tom Curatolo, CFO of Hometown America, an owner and operator of housing communities, says the company will be making some layoffs despite its strong performance as it sheds the weaker assets in its portfolio.
In other cases, some who want to hire say they can't. Attracting and retaining qualified employees ranks as one of CFOs' top concerns. Fritz Prine, finance chief at Westfield Steel, a steel distributor and processor, says his company is struggling to find qualified labor, despite its location in the economically distressed Midwest. Prine says he has 14 open positions that he has been trying to fill for eight months. "We can't find machinists," he says. "We are relying too much on the people who have been here for a while, and we are running them in 12-hour shifts and on the weekends and constantly trying to train people."
North Highland's Hancock says his firm is hiring, but finds many people now employed are not eager to make a move. "At this point, people who have a decent job count themselves lucky. If they have something pretty stable, they tend to be a little more cautious," he says. (Nonetheless, bucking the national trend, North Highland will have record hiring this year.)
Meanwhile, at TMP Worldwide, a communications firm focused on recruitment advertising programs, CFO Tom Fitzsimmons says the company is "doing fairly well" and hiring, but he can't find enough of the digital and social-media experts he needs. "We have to mint these people," he says. "We bring people in, train them up, and hope that we retain them." Still, he notes, "as an economy, we are not generating enough activity to make that next hire an additional hire. We're kind of moving sideways."
It is this "moving sideways" sentiment that has more than half of CFOs holding on to their cash. A third of CFOs say they will not deploy excess cash this year, because they want to retain it should credit markets tighten. Twenty-nine percent say they are hoarding cash due to economic uncertainty, and 31% say they don't have any excess cash to spend.
"We all know that everyone's sitting on lots of cash, driven by the overall economic uncertainty," says Hancock. "Until that fog lifts, people will continue to sit on as much liquidity as they can."
Kate O'Sullivan is a deputy editor of CFO.