The Economy

The Problems of Prosperity

The Duke/CFO Global Business Outlook Survey reveals new challenges for U.S. finance executives.
David W. OwensMarch 11, 2015
The Problems of Prosperity

U.S. finance executives have started out the year building confidence in a continued economic recovery, according to the most recent Duke University/CFO Magazine Global Business Outlook survey. The first-quarter survey tabulated the views of 547 senior finance and corporate executives from U.S. companies, along with 383 executives from other countries around the world.

Economic optimism of U.S. finance executives took another tick upwards in the first quarter of 2015. On a scale from 0 to 100, confidence in the economy came in at 64.7, rising one percentage point from the rating at the end of last year. This represents the highest rating U.S. executives have given the economy since 2007, before the advent of global recession. The U.S. economic outlook continues to be second only to that of Asian executives (outside of Japan), who gave their domestic economies an average rating of 66.5.

Movement in Wages, But Not in Prices

However, the strengthening economy also brings with it new challenges to growth. In particular, companies are becoming more concerned about the squeeze between sluggish revenue growth and upward pressure on wages and salaries.

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Policies aimed at keeping the lid on inflation and holding down interest rates have indeed helped keep costs down. But, in combination with increasing competitive pressures, they have also limited price increases for American businesses. U.S. respondents in the first quarter project sub-inflationary pricing increases of only 0.8 percent on average over the course of the year.

At the same time, they expect wages and salaries to rise by an average of 2.7%. After a prolonged period of a so-called “jobless” recovery, U.S. companies once again are starting to feel increased pressure to attract and retain skilled workers. As one survey respondent wrote, “As the economy improved, salaries at competitors rose and employees left.”

Consequently, real wages have begun to show signs of movement — 63% of U.S. respondents noted that their companies either plan to increase real wages over the next 12 months, or have already done so.

U.S. Companies Facing Revenue Challenges

Finance executives recognize that they have their work cut out for them in growing revenues in step with the economy. Listing new challenges that have emerged over the last six months, many U.S. respondents point to the strong dollar combined with a skittish consumer. Appreciating against most major currencies, the strong U.S. dollar has cut into revenues, hurting U.S. exports while making cheaper imports more attractive to consumers.

A number of survey respondents made note of the disappointing revenue growth. One executive summed up the feelings of many others when he wrote, “While economic growth has continued, it seems that customer optimism for continued growth diminished.” Another commented, “Sales growth has flattened, and we can no longer expect sales growth each year as we used to do.” According to others in the first-quarter survey, the demand problem was only made worse by the nine-month strike among dock workers in West Coast ports, which was not settled until late in February of this year.

Clearly, while U.S. executives recognize the opportunities that a strengthening economy provides, they also acknowledge the hard work required to fully realize those opportunities.

Subdued Outlooks in Latin America and Europe

Other regions of the world are more apt to be struggling with the problem of overcoming weakness, rather than taking advantage of growth. In Latin America, the economic outlook continues to decline, coming in at 49 on a scale of 0 to 100. Prospects are particularly grim in Brazil, where respondents only give their economy a rating of 39. Only a few quarters ago, this region led the world in terms of economic optimism. Now, it has sunk below the level of the still-troubled European region.

In Europe, economic optimism has risen from 53.5 at the end of 2014 to 57.9 at the start of 2015. However, confidence in the local European economies remains below long-run averages. Executives in the region do not expect employment to grow over the next 12 months, and wages are expected to rise by less than 2%.

European business leaders remain skeptical about governmental initiatives to get their economies back on track. The European Central Bank is embarking on a bond-buying program to spur economic growth and increase inflation, but less than a quarter of European respondents (23%) believe that the quantitative easing program will be successful. A more widespread belief is that the program will benefit financial markets, but have little impact on the real economy.

Instead, European finance leaders are more likely to advocate for new approaches. More than 80% of European respondents think that structural reforms to the labor market and public sector would be effective, and 70 percent believe that direct investment by the government would spur the economy.