The Economy

Pending Tax Cut Sends CFO Optimism Soaring

Robust earnings and growth in tech spending are on the agenda, say CFOs, as are higher wage and benefits costs.
December 13, 2017
Pending Tax Cut Sends CFO Optimism Soaring

Business optimism among CFOs in the United States and some other countries has reached record levels, according to the more than 800 CFOs responding to the latest Duke University/CFO Global Business Outlook survey.

The quarterly survey’s CFO optimism index in the United States increased to 68.6 on a 100-point scale, the highest recording of 2017. Among the CFOs who responded to the late-November-to-early-December survey after the U.S. Senate passed its version of the tax cut bill, optimism spiked to 73, which is the highest U.S. CFO optimism level ever recorded. (The survey, in partnership with Duke University’s Fuqua School of Business, has been conducted for more than two decades.)

CFOs’ confidence in the performance of their own companies also strengthened in the quarter, as the optimism index rose to 71.3, up from 70.2 in September.

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In a reflection of that optimism, U.S. CFOs projected that both capital spending and employment at their firms would increase by a weighted average of 3.2% in 2018. They also forecast average earnings growth of 5.6% and tech spending growth of 4.8%.

To finance some of this, U.S. CFOs expected to be able to increase product prices. On average, surveyed CFOs said the prices of their own firms’ products would increase 2.7% next year.

Tight Labor Market

While CFOs are highly optimistic about their own businesses and the U.S. economy, they are worried about finding the workforce and talent to execute on their plans and investments.

The proportion of firms that indicated they are having difficulty hiring and retaining qualified employees was at a two-decade high for the survey; 43% of CFOs called the issue a top concern.

U.S. firms said they plan to increase employment by a median of 2% in 2018. But U.S. CFOs expected to pay higher wages to achieve that increase. They forecast median wage growth of about 3% over the next 12 months. Wage growth should be strongest in the tech, energy, and retail/wholesale industries, according to CFOs.

After the labor market, the next biggest concern among U.S. CFOs was also human-capital related: the cost of employee benefits. Health-care costs are expected to rise by more than 8% next year. Nearly half of U.S. CFOs surveyed indicated that the cost of employee health benefits crowded out their ability to spend on long-term corporate investment.

Data security issues rose to third on the list of top concerns, its highest ranking ever.

Rapid Pace of Innovation

It’s not only optimism that is driving higher tech spending and employment at many U.S. firms, this quarter’s survey found, but also the rapid pace of innovation.

Sixty-two percent of CFOs indicated the pace of innovation at their firms has grown faster in the past three years. Among those companies, 63% indicated the rapid pace of change had caused their firms to focus more on the near-term, and 40% said they now choose projects with shorter lives.

Those firms also indicated that they have had to invest more to keep up. As a result of more rapid innovation, 76% indicated they boosted capital spending and 46% said they increased research and development outlays. Some firms — 31% — said innovation has spurred them to tackle ambitious, “moonshot” projects.

Work — Life Balance 

One potential constraint on all these plans for 2018 could be the stamina of CFOs.

In a series of special questions, this quarter’s survey found that finance chiefs spend two-thirds of their waking hours working, and many surveyed said they would prefer to be on the job much less than that. The preference to work fewer hours was pervasive, regardless of the current number of hours worked.

Most CFOs who work 80% of their waking hours would prefer to work between 50% and 60% instead, while CFOs who currently work 50% of waking hours would prefer to work 40% or fewer. Those trends held across industries and around the world.

The typical CFO of a company in Asia works 73% of his or her waking hours, slightly higher than CFOs in Europe (72%), Africa (70%), and Latin America (69%). CFOs from all regions indicated they would prefer to work about 20% fewer waking hours per week.

Around the Globe

In tandem with the economic confidence in the United States, CFO optimism increased around the world, according to the fourth-quarter survey. Among the results:

  • Optimism among finance chiefs in Canada remained strong, hitting an index score of 64. Capital spending was forecast to increase by about 4% and employment by about 2%, on average, in 2018.
  • Optimism in Europe jumped to 67 this quarter, the highest level in a dozen years. Capital spending was projected to increase 4.8% and full-time employment 3.9%.
  • Optimism was also strong in Asia, at 66. Median 5% growth in capital spending and 2% employment growth were expected in 2018.
  • Latin American optimism continued to rebound in most countries, climbing to 73 in Mexico, 71 in Peru, and 61 in Brazil. In stark contrast, optimism was only 28% in Ecuador. CFOs projected that median capital spending growth in the region would be 5% next year, while median employment would be flat.
  • Business optimism in Africa increased 1 point to 53 this quarter, still the lowest in the world. Capital spending was forecast to increase by about 1% and employment by 3%, in 2018.

The survey concluded Dec. 8. The respondents numbered nearly 300 from North America, nearly 100 from Asia, 148 from Europe, 215 from Latin America, and 55 from Africa.

Homepage image: Thinkstock

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