There’s good news and bad news. The good news: The U.S. economy remains stable; interest rates, oil prices, and inflation are all low; and the dollar is strong. Unfortunately, the bad news is exactly the same as the good news.
The first-quarter results from the latest Duke University/CFO Magazine Global Business Outlook survey reveal the unsettled nature of business planning across different sectors of the economy. Survey results suggest that U.S. executives are still struggling with the best way to translate economic optimism into growth for their own companies. Many appear to have their doubts that “slow and steady” will be enough to fuel recovery at the corporate level, regardless of their individual expectations for the economy.
Expectations for U.S. economic growth remain positive but not spectacular. As a result, consumers remain skeptical, the Federal Reserve seems to be holding off on its stated intent to raise interest rates, and businesses find that they can’t count on inflationary growth. In the meantime, the unexpected surge in the dollar just makes it all that more difficult for U.S. businesses to compete, either domestically or abroad.
Despite these worries, for the most part respondents in the first quarter of 2015 have a more positive outlook for the U.S. economy than their counterparts did a year ago. The exceptions are in transportation, where business fell off as a result of last year’s extended dock strike at West Coast ports, and in the energy sector, where the drop in oil prices has hit the hardest. Also, economic confidence for retailers and wholesalers has remained relatively steady, but not improved.
Feeling the Squeeze on Costs
Finance executives in the retail/wholesale and manufacturing sectors remain relatively upbeat about the overall prospects for their companies. But, with new uncertainties over both pricing constraints and soft demand, they also are becoming even more cost-conscious than usual.
The absence of a strong economic rebound may be taken as a cause for caution, or even a bad sign, by the consuming public. A CFO in the education sector comments in the survey, “While economic growth has continued, it seems that customer optimism for continued growth diminished.”
Executives from other sectors echo that perception. A VP of finance for a manufacturing company reports that “decline in demand for our products has been more severe than we have seen in the past,” while a CFO from the retail/wholesale industry writes, “Sales growth has flattened, and we can no longer expect sales growth each year as we used to do.”
Particularly in retail/wholesale and manufacturing, the stability of the U.S. economy relative to other countries may in fact be tightening the lid on the domestic market. The sudden strengthening of the dollar against most other currencies is resulting in “exposure to currency headwinds for international markets,” as a strategic planning manager put it. The CFO of a manufacturing company underscores the uncertain economic environment, raising the question but leaving open the answer: “We were doing very well in Europe and Canada, but with the rising dollar….”
In the face of this uncertainty, finance executives can ill afford to neglect any of their companies’ cost components. For example, respondents from retail/wholesale companies and from manufacturing companies both rank the cost of benefits as one of their top concerns. The fallout from new Affordable Care Act (ACA) requirements is starting to hit companies — especially smaller ones — and an executive from the mining/construction sector laments that he expects his biggest problem to be “keeping pricing in check as additional benefits must be included in overhead.”
In the technology sector (which includes both software and biotech companies in our survey), executives also express employee concerns. In their case, however, they are finding their businesses affected by a tight labor market, and they rank attracting and retaining qualified employees as the top concern.
Particularly for technology companies, skilled employees will be the foundation for growth. One executive writes that he expects his company is most at risk for a “lack of innovation (to bring new products to market)” — which typically is overcome only by bringing to bear the specialized and focused expertise that drives this sector.
Moving on in Health Care
In the financial services, health care, and pharmaceutical sectors, executives appear ready to move forward, following a year with more than the usual concerns over regulatory requirements. In health care, for example, there remains “uncertainty surrounding [the ACA] with respect to which provisions will be implemented/delayed/eliminated,” says one finance chief in the survey. The debate over restructuring Medicare is also having an effect, as another CFO points to the “payment decrease for services rendered to government” as his biggest concern.
Not surprisingly, this concern also leads the same CFO to write, “Company financial performance will not allow increased cost” — for instance, for wage increases. With health care executives identifying the ability to attract and retain qualified employees as one of their major concerns, right along with government policies and regulatory requirements, they will have their work cut out for them in terms of seeking ways to balance these countervailing forces. But this year’s health care respondents appear to feel much more strongly than last year’s that they will be up to the task.
On the plus side for financial services companies, the first-quarter survey was completed just as banks were learning that they had indeed passed the Federal Reserve’s stress tests. Although conducting the tests themselves taxed resources and led to worries about constraints on available capital, commercial lenders at least may feel they have some firmer ground on which to move forward. Their ability to come through the rigorous testing may help account for their more optimistic outlook.
Of course, the banks will continue to have to deal with “continued regulatory burdens and incremental requests by regulators to manage risks and capital,” as a respondent writes. However, attention in financial services is now focused more on trying to discern the Fed’s shifting timetable for raising interest rates. As a respondent writes in obvious disappointment, “Interest rate hikes seem more distant than previously thought.” Another notes, “Competition is very strong for business,” and as a result, “interest rates are at levels that tread on profitability.”
In addition, a tidal wave of reports of massive consumer data breaches swept through different industry sectors last year, setting off alarms on the radar screens of executives in the financial services industry as well. Consequently, data security has moved up on their list of concerns this past quarter.
All in all, the first-quarter survey results show gains over last year’s survey in terms of overall executive confidence, but as always, the devil will be in the details. Executives acknowledge a host of uncertainties in the year ahead, and next year’s confidence ratings will depend on how well those executives can translate this year’s optimism into decisive actions.