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Dog Days for the Economy?

Hiring and capital spending will slow over the next year, due partly to rising energy and raw-material prices.
Joseph McCafferty, CFO Magazine
July 1, 2005

It may be the middle of summer, but finance executives expect the U.S. economy to begin cooling off. They predict that hiring and capital spending will slow during the next year, due partly to rising energy and raw-material prices. In fact, CFOs are less optimistic about the prospects for the economy than they have been in more than two years.

According to the Duke University/CFO magazine Business Outlook Survey, just 40 percent of respondents say they are more optimistic than they were last quarter. That's down from 46 percent in March, when the survey was last conducted, continuing a downward trend. And 26 percent say their outlook is declining; last quarter, only 18 percent of CFOs held negative views on the economy.

"This is a new low for CFO optimism," says John Graham, professor of finance at Duke's Fuqua School of Business. "In situations like this, where optimists barely outweigh pessimists, we can expect to see sluggish economic growth."

The reasons finance executives continue to be less than giddy haven't changed much since last quarter. Health-care costs and high fuel prices again top their list of concerns, followed closely by rising interest rates. Not coincidentally, these factors are the ones wreaking havoc on U.S. automakers. When General Motors announced in June that it would eliminate 25,000 manufacturing jobs by 2008, it cited high health costs as a major contributor to its need for cuts. Economists had already begun to worry about employment figures, when Department of Labor data showed only 78,000 jobs added in May. That was the lowest amount since August 2003, and well below April's addition of 274,000 jobs.

Indeed, survey respondents expect to increase hiring by little more than 1 percent in the next 12 months, down slightly from last quarter's projections. CFOs also say they expect to slow growth in capital spending: the 4.5 percent increase they are projecting during the next 12 months is down from 5.4 percent last quarter.

Concerns are also on the rise among finance executives in Europe and Asia about their own economies. European CFOs have especially low expectations for future growth. Just 16 percent are more optimistic now than they were in March, when 38 percent said they felt better about the economy. Almost half say they are now less optimistic. In addition, more than a third of European respondents expect layoffs in the next year. In Asia, where economic confidence has been high, CFOs are decidedly less bullish now. While 57 percent say their outlook is still positive, that figure is down sharply from 70 percent in March. The reversal is based largely on higher labor costs: more than 90 percent of Asian CFOs say that unit labor costs are beginning to increase at their companies.

Back home, U.S. CFOs are also concerned about the rising federal budget deficit, and they are looking to Congress to do something about it. Finance executives ranked lowering the deficit and overhauling the tax code first and second, respectively, on a list of items that they consider priorities for attention by lawmakers. Changes to Social Security, which has garnered plenty of attention on the Hill and at the White House, ranked a distant third.





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