Nearly two-thirds of U.S. chief financial officers believe is very important for Congress to address the cost of health care; a similar percentage feel that way about addressing the budget deficit. Only 31 percent of CFOs, however, believe that it is very important to implement Social Security reform.

These are some of the findings of the Duke University/CFO Magazine Business Outlook Survey, which asks chief financial officers from both public and private companies, and from a broad range of industries and revenue levels, about their economic projections. The survey was concluded February 27 and generated responses from 534 CFOs, including 293 from the United States, 183 from Asia, and 58 from Europe.

This quarter, 46 percent of U.S. CFOs are more optimistic about the economy than they were last quarter, continuing the downward trend of the past year. In each of the past two quarters, 55 percent said they were more optimistic; three quarters ago, that figure was 70 percent. “While there are still more optimists than pessimists, this is the least optimistic that CFOs have been in the last two years,” said John Graham, professor of finance at Duke’s Fuqua School of Business.

To understand the causes of this less sanguine outlook, the survey asked executives to name the top issues facing their companies. Worldwide, more than half of respondents listed competition as one of their top concerns. In the United States, 53 percent of CFOs cited high health-care costs as a top issue; in the coming year, they expect those costs to increase by 9 percent. High fuel prices, increased interest rates, and fears about increased regulation round out the top concerns for U.S. finance chiefs.

European and Asian CFOs didn’t consider health-care costs to be a major issue, but they did cite concerns about world economic stability and reduced pricing power.

More than 20 percent of CFOs stated that rising unit labor costs are a moderate or major problem at their companies; another 30 percent said those costs are a small problem. Federal Reserve Board Chairman Alan Greenspan recently stated that such increases would be one of his major concerns if productivity falls. This may already be happening: 69 percent of U.S. finance chiefs said that unit labor costs are increasing at their companies.

Meanwhile, the depreciating U.S. dollar is offering little relief for companies stateside, said Campbell Harvey, professor of finance at Duke. “The conventional wisdom, especially out of Washington, is that a weaker dollar helps U.S. businesses,” Harvey said. “However, that’s not what Main Street is telling us.” Fully 47 percent of CFOs said the depreciating dollar will hurt their firms, compared with only 27 percent who said it will help. Specifically, the companies cited rising material costs on imported inputs as a major factor, which suggests that many businesses cannot pass on those higher costs and are being squeezed by the dollar.

After robust growth last fall, anticipated employment gains have slowed. Fewer than half of CFOs expect employment to grow at their companies, compared with 60 percent who expected growth in last quarter’s survey. Employment growth is projected to average 1.7 percent domestically, down from the 3.1 percent predicted last fall — and also less than the expected 3 percent growth in outsourced employees.

Earnings are expected to grow an estimated 10 percent; capital spending is anticipated to show modest growth of 5.4 percent. Tech spending, however, is projected to increase just 2.4 percent. Worse still, the CFOs said advertising and marketing expenditures will rise by only 0.9 percent — less than one-third of the growth predicted in last fall’s survey.

On a positive note, the survey results indicate that inflation should be subdued in the coming year; the CFOs said that they expected the prices of their products to increase only 2 percent in the next 12 months. Further, mergers and acquisitions are expected to increase at 49 percent of U.S. companies in coming year, similar to the figures for companies in Europe (50 percent) and Asia (44 percent).

The survey also asked CFOs about the balancing point with respect to growth and inflation for the Federal Funds rate. Thirty-five percent of CFOs responded that a Fed Funds rate of 3.0 would be the highest attainable without slowing growth; another 29 percent cited a rate between 3.25 and 3.5 percent. The mean for all CFOs was 3.1 percent.

“This is perhaps the most disturbing result in our survey,” said Harvey. “While the Federal Funds rate currently stands at 2.5 percent, the Wall Street consensus calls for a Fed Funds rate of 3.75 percent by the end of the year. CFOs are telling us that a rate this high will damage the economy.”

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