The Economy

And That Was Before

Our pre-hurricane Business Outlook Survey indicates that CFOs were already worried about the direction of the economy.
Joseph McCaffertyOctober 1, 2005

Even before Hurricane Katrina devastated the Gulf Coast, CFOs were uneasy about the economy. According to the Duke University/CFO Business Outlook Survey conducted in August, CFOs were less optimistic about the economic prospects of the United States than they have been in four years. Only 29 percent of respondents said they were more optimistic about the economy than during the previous quarter. That’s down from 40 percent in July, when we last conducted the survey.

Katrina is likely to further weaken the economic picture. A week after the hurricane struck, the Congressional Budget Office predicted that the impact could clip as much as a full point from economic growth over the second half of the year and cut employment by 400,000 jobs.

Higher fuel prices will also have a negative effect. Well in advance of the disrupted oil supplies and stratospheric fuel prices, CFOs had already ranked high energy costs as their biggest business concern. And this isn’t just a concern for transportation companies. “Because we ship all over the country, our margins are definitely being squeezed by high fuel costs,” says Tony Aukett, CFO of Continental Paper Grading, a paper recycler based in Chicago.

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CFOs are also worried about what some consider to be a bubble in the housing market. More than two-thirds of finance chiefs believe that a sudden decline in housing prices would harm their firms. Whether or not Katrina will be the pin that pops that bubble remains to be seen.

The biggest surprise of the survey is a turnaround in the outlook of European CFOs. Optimism spiked from a low of just 16 percent last quarter to a much rosier 42 percent. The more-positive results were based on higher expectations for earnings and capital spending, and low inflation. Kees Koedijk, professor of financial management at RSM Erasmus University in Rotterdam, says the result “could reflect a turning point for the European economy.”