The Economy

Housing, Fuel Are Top CFO Concerns

Finance chiefs predict only modest growth in employment and capital spending; ''CFOs realize that the economy is very vulnerable right now.''
CFO StaffAugust 31, 2005

Chief financial officers are more pessimistic than ever about the U.S. economy, pointing to the effects of a housing bubble that might burst, high fuel and health-care costs, increasing interest rates, and reduced pricing power.

These are some of the findings of the September 2005 Duke University/CFO magazine Business Outlook Survey, which asks chief financial officers from a broad range of public and private companies worldwide about their economic projections. This latest quarterly survey was concluded August 28 and generated responses from 1,584 CFOs, including 374 from the United States, 144 from Asia and 1,066 from Europe. (The survey of European CFOs was conducted jointly with Erasmus University RSM in the Netherlands; results cited here are for U.S. companies unless explicitly stated otherwise.) Detailed results are available at

This quarter, only 28.6 percent of U.S. finance chiefs are more optimistic about the economy than they were last quarter, while 37 percent are less optimistic. In the four years of the survey, this is the first time that CFOs with growing pessimism outnumbered CFOs with growing optimism. Indeed, the level of optimism is down sharply from last quarter’s 40 percent and is strikingly lower than last year’s 72 percent.

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“This is the greatest increase in pessimism that we have seen,” says Don Durfee, research editor of CFO magazine. “We’ve found that this optimism index predicts future economic growth quite well. In a situation like this, where the growth in pessimism outweighs the growth in optimism, we expect to see a slowdown in economic growth.”

U.S. finance chiefs cited high fuel costs as the number-one worry for their businesses, surpassing health-care costs for the first time since the survey has addressed these concerns. Other high-priority items include rising interest rates, increased regulation, and reduced pricing power.

European CFOs list increased global competition, world economic stability, increasing salaries and wages, and reduced pricing power as their top concerns. Asian firms are most concerned about high fuel prices, global competition, and rising salaries and wages.

CFOs also apparently believe that “a housing correction will have spillover effects that will hurt corporate America,” according to John Graham, professor of finance at Duke’s Fuqua School of Business and director of the survey. More than two-thirds of finance chiefs believe that a decline in the U.S. housing market would harm their businesses, including nearly 28 percent who believe that a correction would harm them moderately or greatly.

Capital spending plans remain modest. While 64 percent of U.S. finance chiefs say they will increase capital spending in the next 12 months, the increase will average only 4.7 percent (down from 5.4 percent six months ago) — “barely sufficient to replace depreciated assets,” says Duke finance professor Campbell R. Harvey, founding director of the survey. “CFOs realize that the economy is very vulnerable right now. The natural reaction is to roll back capital spending plans.”

Half of U.S. companies expect to increase employment this year, while 28 percent expect to reduce employment. However, overall employment should increase 1.6 percent in the next 12 months. At the same time, outsourced employment should increase at 52 percent of businesses, with growth averaging 4 percent.

U.S. companies also report heightened anxiety about the threat of terrorism. On a scale from zero (no impact) to 100 (maximum negative impact), the terrorism index stands at 22.6 in the United States, up from 18.0 six months ago. “One-third of U.S. firms also say that the threat of terrorism is significantly affecting their bottom lines,” says Graham. “We were also surprised to see that U.S. firms are much more active than their European counterparts in responding to the threat.”

More than 60 percent of U.S. companies report having taken actions in response to those concerns. Half have increased security at their facilities, 27 percent have created redundant operating systems, and 19 percent have created redundant financial systems; only 12 percent have restricted travel. In contrast, only one-fourth of European businesses have taken such actions. Across Europe, only 14 percent have increased security at their facilities; even in the United Kingdom, that figure is just 12 percent.

Price increases at U.S. companies are expected to average 2.8 percent next year, an increase from the 2.1 percent increase anticipated last quarter. Nearly half of the surveyed businesses say that they will increase mergers and acquisitions activity in the coming year. Fifty-two percent of CFOs say that their firms plan to increase their cash holdings, with an average increase of 3.9 percent.