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Tentative optimism rings in the new year.
Joseph McCafferty, CFO Magazine
January 10, 2007
CFOs are feeling better about the prospects for the U.S. economy in 2007. According to the Duke University/CFO Business Outlook Survey, 30 percent of finance chiefs say they are more optimistic about the direction of the U.S. economy. That's up from last quarter, when just 20 percent — a five-year low — held a positive view. CFOs also predict that 2007 will bring more prosperity to their own companies. Nearly half say they are more optimistic about future results.
Even with improving expectations, finance executives say they still have some major concerns, first and foremost among them weak consumer demand. "There is considerable worry that the slump in housing activity will negatively impact consumer spending and eventually hit corporate profits," says Campbell R. Harvey, a professor at Duke's Fuqua School of Business. CFOs are also worried that increasing labor costs could become a problem. Finance chiefs say they will spend an additional 3.6 percent on wages and salaries in 2007.
Reflecting this cautionary stance, U.S. CFOs are scaling back. They say they will increase capital spending just 4.9 percent over the next 12 months, down from plans in June to spend an additional 7.5 percent. They are also reducing domestic hiring, with an increase of just 1 percent likely for the coming year. Instead, they expect to increase the use of outsourcing by 6.8 percent.
CFOs also voiced concern about the effect of private-equity firms on the market for acquisitions. Half say these firms are driving up the price of acquisitions to unreasonable levels. Despite the high prices, a third say they will increase the amount of merger-and-acquisition activity that they pursue in the coming year.
Overseas, expectations are notably brighter. In Europe, 47 percent of CFOs are more optimistic about the European economy than they were last quarter. And in Asia, 66 percent of finance chiefs say they expect that region's economy to continue to perform well in 2007.