CFOs to Bush: Clean Up Iraq, Deficit

Health care costs, social security and tax code reforms, and homeland security are other top priorities revealed by the latest Duke University/CFO ...
Don DurfeeDecember 9, 2004

Will 2005 be the year that the U.S. economy finally stages a full recovery? Don’t hold your breath, the findings of a new survey of CFOs suggest.

Indeed, chief financial officers of U.S. corporations are less bullish about the economy in 2005 and are particularly concerned about health-care costs and intense competition According to the Duke University/CFO Magazine Business Outlook survey.

They also rank the budget deficit and Iraq at the top of a list of items on which President Bush should focus during his second term. And executives at 36 percent of the companies surveyed report that fears about domestic terrorism are significantly affecting their bottom lines.

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The Business Outlook survey asks CFOs from a broad range of public and private companies about their economic projections. The most recent study was concluded Dec. 5 and generated responses from 308 executives.

The survey asked executives to choose the top four items, from a list of 12, on which President Bush should focus his attention during his second term. More than two-thirds of the CFOs believe that addressing the U.S. budget deficit should be at the top of the president’s list, while another 65 percent think the situation in Iraq should be a top priority. Health-care costs, Social Security and tax-code reforms, and homeland security are other top priorities; each was chosen as one of the top four items by about 40 percent of the executives.

“This is a tall list of priorities that demand the president’s attention,” said John Graham, professor of finance at Duke and director of the survey. “But several notable items do not rank as priorities. Fewer than one-fourth of CFOs believe that the president’s top priorities should include improving relations with allies, the trade deficit, the weakness of the U.S. dollar, or high oil prices. Lack of concern about high fuel prices carries through to corporate activities, as only one in five of the companies we surveyed has implemented strategies to reduce fuel consumption.”

The survey also asked executives to choose the top four risks to their companies during 2005, again out of a list of 12. Two-thirds of CFOs list health-care costs as one of their top concerns, and another 56 percent list intense competition as one of their fears. Slightly more than 40 percent are concerned about the price of fuel and rising interest rates.

Concerns about domestic terrorism have declined since last quarter, but the survey’s business terrorism index shows that the possibility of an attack is hurting business results. Researchers for the survey asked CFOs to rank on a scale from 0 to 100 the negative impact that the threat of terrorism is having on their bottom line (where zero means no impact and 100 indicates maximum negative impact). While the terrorism index currently stands at 19.4, 36 percent of firms say the threat of terrorism is significantly affecting their bottom line.

After robust growth this fall, employment gains appear to have stalled. CFOs expect employment to grow only 0.8 percent in 2005, down from 3.1 percent predicted last quarter. Also, health-care costs are expected to rise 8.4 percent.

Despite those concerns, the survey results indicate that the bottom line should fare moderately well next year, with earnings expected to increase by 11 percent. Moreover, just over half of the executives say they are more optimistic about the economy, and their firms, than they were last quarter.

“All of these numbers are down from last quarter, and other predictions are even less favorable,” noted Graham. “Capital spending is expected to grow only at a ‘replacement level’ of 3.8 percent, and tech spending will increase just 4.9 percent. Worse still, the CFOs say, advertising and marketing expenditures will rise by only 2.3 percent, which is less than half of the growth predicted in last quarter’s survey.

“In addition, outsourced employment is expected to rise at more than half of the firms we surveyed, with the increase in outsourced employment expected to increase 4.3 percent. Finally, CFOs are significantly less bullish than Wall Street about the prospects for economic growth: respondents forecast a GDP growth rate of 2.8 percent, compared with Wall Street’s consensus forecast of 3.3 percent,” he said.

The survey also asked CFOs how much employees should expect from year-end bonuses this year. The average bonus will exceed last year’s by about 10 percent—and will represent about 11.5 percent of annual wages. Although the average bonus will increase, it will be bigger at only about half of companies. Bonuses will decline at one in five firms, the researchers found.