The Tax Cuts and Jobs Act may be getting a lukewarm reception from consumers, but CFOs are clearly over the moon about the lower corporate income tax rate and other provisions. CFO optimism in the United States is at its highest since 1996, and finance chiefs are making concrete plans for spending the tax cut windfall.
According to the results of the latest Duke University/CFO Global Business Outlook survey, which ended March 2, more than 40% of U.S. companies say they plan to boost wages and 38% say will increase hiring in 2018 because of the recent tax cuts. About 36% will increase domestic investment and 31% will increase cash holdings. And, among companies with defined benefit pension plans, 29% say they will increase pension contributions.
Sixty-six percent of U.S. CFOs say corporate tax reform is helping their companies, with 36% saying the overall benefit is medium or large.
“Some benefits of tax reform are already being felt, while others will unfold over the next several years,” said John Graham, a finance professor at Duke’s Fuqua School of Business.
Among companies that plan to increase investment, 53% say the reduced corporate income tax rate is the reason why. Another 44% indicate the immediate expensing of capital expenditures enacted under the new law will fuel investment. The immediate expensing of investment only lasts for five years, however, and 37% of companies indicate they will shift investment so it will occur within the next five years.
Due to tax reform, the effective (or average) tax rate for U.S. companies is expected to fall by about 5 percentage points, to 18.8% from 24%. The lower U.S. tax rate increases the after-tax return on investments, making the United States a more attractive place for foreign companies to deploy their money. About half of Canadian, Latin American, and Asian CFOs responding to the Duke/CFO survey say that the reduced U.S. corporate income tax rate makes the United States a more attractive place to do business.
The CFO optimism index in the United States increased to 71 on a 100-point scale in the first quarter, an all-time high. Optimism among finance chiefs remains elevated around the world, anticipating strong global economic conditions.
“Our analysis of past results shows the CFO optimism index is an accurate predictor of future economic growth and hiring, therefore 2018 looks to be a very promising year,” said Graham.
However, “promising” doesn’t mean without challenges.
With the United States at or near full employment, the proportion of firms indicating they are having difficulty hiring and retaining qualified employees remains at a two-decade high, with 45% of CFOs responding to the survey calling it a top concern, up from 43% last quarter. The median U.S. firm says it plans to increase employment by 3% in 2018.
The tight labor market also continues to put upward pressure on wages, with wage inflation now listed near the top half-dozen concerns of U.S. CFOs. U.S. companies expect to pay higher wages, with median wage growth of about 3% over the next 12 months. Wage growth should be strongest in the tech, energy, and service/consulting industries.
After difficulty finding the right employees, the next largest concern among U.S. CFOs in the first quarter is the cost of benefits, followed by government policies, regulations, and data security.
The first-quarter Duke/CFO survey asked a series of special questions about blockchain and cryptocurrencies. Blockchain is widely expected to modify many business models over the next decade as a means of verifying ownership and allowing secure and nearly instant transactions with low fees.
But 78% of U.S. CFOs responding to the survey say they don’t expect to be affected — or aren’t sure how they’ll be affected — by blockchain. Seventeen percent say their firms will be affected but haven’t yet adapted their business model in response. Another 4% say they are working to adopt blockchain, and just 1% say they have already adopted the technology. Only 3% of U.S. CFOs claim to understand it.
“The U.S. needs to wake up in the fintech space,” said Cam Harvey, a founding director of the survey, who teaches a blockchain innovation course at Duke’s Fuqua School of Business. “China is doing nearly $10 trillion in mobile payments, while the U.S. is barely over $100 billion. Most of the big innovations over the past 25 years have originated in the U.S., but this time is different. There is a lot at stake and, right now, it looks like China will be eating our lunch.”
Twenty-seven percent of survey respondents say they have already reduced their finance workforce or will within five years because of fintech advances. However, more than 70% of finance executives say they do not expect to cut finance employees because of finance technology, or “fintech.”
“Finance back-office jobs are low-hanging fruit for the fintech disruption,” Harvey said. “It’s logical to expect that 70% of firms will cut finance employees, not the other way around.”
In contrast to the United States, nearly 20% European CFOs say they understand blockchain technology well, up from only 8% who said they did two years ago.
The first-quarter 2018 Duke University/CFO Global Business Outlook generated responses from more than 600 CFOs, including nearly 300 from North America, 63 from Asia, 106 from Europe, 86 from Latin America, and 47 from Africa.
The survey has been conducted for 88 consecutive quarters and spans the globe, making it the world’s longest-running and most comprehensive research on senior finance executives.