Treading Water

CFOs say the economy will continue to grow, slowly.
Kate O'SullivanJuly 15, 2011

Finance chiefs’ spirits have hit the summer doldrums. Buffeted by bad news about rising oil and commodity prices, declining home sales, bouts of severe weather at home and abroad, and ongoing global political instability, CFOs are less optimistic than they were last quarter, according to the latest Duke University/CFO Magazine Global Business Outlook Survey.

Just 27% of U.S. CFOs say they are more optimistic about the economy this quarter than they were last quarter, while 36% say they are less optimistic, according to the survey. When finance chiefs rate their optimism on a scale of 1 to 100, the results are less dramatic and remain well above the low hit during the depths of the recession. Still, at 57 out of 100, optimism levels are down from 61 last quarter and roughly even with a year ago.

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“Three to six months ago, I definitely had a more positive outlook on the economy,” says Greg Gould, finance chief at SeraCare Life Sciences, a small, publicly traded biotechnology firm. “Now I’m a bit more worried that there could be some kind of a double-dip [recession].” SeraCare, which counts the National Institutes of Health as a customer, benefited from stimulus spending included in the American Reinvestment and Recovery Act. Now, says Gould, that impact appears to be fading.

Consumer demand remains CFOs’ top macroeconomic concern, followed by the federal government’s agenda and price pressure from competitors. At their own businesses, finance chiefs are most worried about their ability to maintain margins. But perhaps more than any single concern, a general feeling of uncertainty plagues CFOs. Worried about the state of the recovery, the global macroeconomic environment, and the possibility of regulatory changes in the United States, “people are really nervous,” says Gould. “Most businesspeople just want more clarity.”

In the face of such uncertainty, finance chiefs are also scaling back their spending plans. While capital spending will grow by nearly 9% on average over the next 12 months — a solid number — that’s down from 12% in expected spending growth last quarter. Similarly, research-and-development spending will grow 2%, down from 4% three months ago, and advertising and marketing outlays will grow by 2.5%, down more than a percentage point. Among the critical spending categories tracked in the survey, only technology spending expectations have increased from last quarter, at 6% versus 5.5%.

Now Not Hiring
Perhaps most disappointing, hiring numbers are down. CFOs report that they will expand their workforces by less than 1% over the next 12 months, a number that translates into fewer than 100,000 new jobs a month. The pace will not make a significant dent in the current unemployment rate of 9.1%.

Dan Marchetti, CFO of Urschel Laboratories, a manufacturer of food- and chemical-processing equipment, says that although the company weathered the recession well, it is hiring only cautiously, despite the fact that it receives hundreds of résumés for every job posted. “We are trying to balance hiring with increasing overtime for our manufacturing staff,” he says. “We’ve never had a layoff, so we’re very cautious.” The company has increased staff by more than 2% in the past year.

Marchetti is not alone in his guarded approach. While finance chiefs plan to increase staff only modestly on average, 16% say they are short-staffed and would like to hire but lack the resources, while 9% say they are looking to hire but are having difficulty finding workers with the right skills.

For those who are currently employed, the outlook is improving somewhat. Sixty-one percent of companies that reduced employees’ hours during the recession have restored those hours or plan to in the next 12 months, and nearly half plan to return training and development efforts to their prerecession levels in that time. Forty-three percent will reinstate company matching of employee retirement plan contributions. CFOs also say wages will rise by 3% on average over the next year.

The Global Outlook
Just under 30% of European finance chiefs are more optimistic than they were last quarter, while 22% are less optimistic. Despite ongoing concerns about Greece — 80% of Europe’s CFOs agree that the country will default within a year without additional financial aid — finance chiefs in the region expect earnings and capital spending to grow by 6% and 4%, respectively, in the next 12 months.

In Asia, while the Japanese crisis has slowed the ability of Asian firms to complete orders, finance chiefs remain more optimistic than their U.S. and European peers. CFOs in the region plan to increase employment by 6% on average in the coming 12 months, and cite the ability to attract and retain qualified employees as their top concern.

Even stateside, there are pockets of growth. John Bax, CFO of the fast-growing online discount Website LivingSocial, says his business has grown from 33 people last year to some 2,000 today. “We’re powering ourselves right through whatever curve there has been in the recession,” says Bax. The company’s biggest challenge? Figuring out how to support the growth.

Would that more companies were having that problem.


Kate O’Sullivan is a deputy editor at CFO.

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