The Economy

3rd-Quarter Economic Outlook: U.S. Stronger, Latin America Weaker

The latest Duke/CFO survey reveals more confidence in the U.S., less confidence in Latin America, and greater concern about regulation
David W. OwensSeptember 9, 2014
3rd-Quarter Economic Outlook: U.S. Stronger, Latin America Weaker

Results from the Duke University/CFO Global Business Outlook survey for the third quarter of 2014 showed continued strengthening in the confidence that U.S. finance executives have both in the economy and in their own companies. At the same time, the gloomier outlook in Latin America has started to erode business confidence in that region.

Each quarter, the Duke University Fuqua School of Business and CFO conduct a survey among finance executives around the world to gauge their views on the states of their economies and their businesses. This quarter, we collected responses from 383 CFOs and other executives at U.S. companies of all sizes, and from 622 executives from countries in Europe, Asia, Latin America, and Africa.

The Global Business Outlook survey asks finance executives to use a scale from 0 to 100 to rate the prospects for their local economies and for their own companies over the next 12 months. In the third-quarter survey for 2014, U.S. economic optimism continued to rise, soaring to new heights at 62.5 out of 100. The optimistic outlook similarly boosted the confidence of U.S. finance executives in their own companies, which came in at 68.9. One year ago, the U.S. own-company optimism level was at 65, and two years ago, it barely hit 62.

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

Latin American Distress 

The solid U.S. outlook stands in stark contrast to trends in Latin America, where 62% of executives said they were less optimistic about their local economies this quarter than last. This level of pessimism was approximately three times higher than seen anywhere else in the world.

The fall has been precipitous for Latin American companies. A year ago, Latin American respondents were leading the world in optimism about their economies. But this quarter, the Latin American index for economic optimism fell to 50.2 out of 100, putting it on a par with the levels seen in the United States only in the aftermath of the Great Recession.

Latin American executives indicated that the pain was being felt within their own companies, as well. In September 2013, the level of own-company optimism in Latin America registered nearly 70 out of 100. This quarter, Latin Americans essentially tied with the troubled Europeans for the lowest levels of optimism in their own companies, coming in at 63.3 out of 100.

Regulation, Legislation, and Taxes 

With the U.S. economy improving — or, at least, not backsliding — the perceived risks from economic volatility have subsided, while historical concerns over the impacts of political decisions have once again risen to the top. In the third-quarter survey, U.S. finance executives see the most significant risks to financial performance now coming from government policies (39% of U.S. respondents) and regulatory requirements (36%).

Since the Citizens United decision in 2009, in which the U.S. Supreme Court lifted restrictions on corporate contributions to political campaigns, companies have had more opportunity than ever to exert their influence over the legislative process. In anticipation of upcoming congressional and presidential campaigns, our survey this quarter included questions about corporate plans for making political contributions.

We found that only about three out of ten U.S. firms (31%) currently make political contributions. Interestingly, public and private companies were equally likely to donate. Among the firms making contributions, the primary reasons were to strengthen relations with policy makers and to make sure their corporate views were heard.

We also found that the larger companies in the survey — above $500 million in revenue — were much more likely to make contributions than the smaller companies. The small to mid-size businesses may believe that their financial results are not affected as much by regulation, or they may simply have decided to apply their earnings to support their growth strategies more directly. Among the most common reasons respondents cited for not making corporate donations were company policies against them, and the perception that political contributions were not particularly effective.

The survey also confirmed that domestic tax policies rank high among the concerns of U.S. companies. A very large portion of the U.S. respondents (76%) said that other countries have tax policies that are more favorable to their firms than the U.S. tax code is. Approximately half of the U.S. respondents agreed that their companies aggressively manage where their profits are realized because of tax considerations (47%), and that tax incentives influence their companies’ decisions on where to locate operations both domestically and abroad (54%).

However, in contrast to the recent media and political focus on a few high-profile tax inversion cases, such as the Burger King/Tim Hortons merger or a rash of proposed deals in the pharmaceutical industry, relatively few companies in the survey (13%) have actively considered reincorporating in another state or country in order to reduce corporate tax obligations.

Minimum wage legislation does not appear to be a concern for the majority of companies in the survey, with 77% reporting that none of their workforce currently earn minimum wage. The consumer sector (retail or wholesale) had the largest percentage of the workforce paid at $8.75 an hour or less, while the technology and consulting sectors were least likely to be affected by minimum wage considerations.

Among the companies that would be affected by minimum wage legislation, firms indicated that they could reasonably accommodate a modest hike to $8.75 an hour (from the current $7.25 an hour). The survey showed that an increase in minimum wage to $8.75 an hour or less would have relatively little effect on current employment levels, but it would also cause more companies to rethink their hiring plans. However, larger increases in minimum wage, in the range of $10 to $15 an hour, would start to be felt across a number of areas, including higher likelihood of layoffs, curtailment of future hiring, reductions in employee benefits, and higher product prices.

Acceleration of the shift away from labor and towards machinery was also seen as a potential consequence of a higher minimum wage. Nearly half of all companies surveyed reported that they had already implemented, or soon would implement, labor-saving technology, such as greater use of robots. At these firms, in particular, the low-wage employees whom minimum wage increases would be designed to help are also those at the most risk of losing their jobs from new labor-saving technologies.

Featured image: Thinkstock