The Economy

CFO Optimism Drops as Risks Multiply

Only 24 percent of finance chiefs are more optimistic about the U.S. economy than they were last quarter; rising wages, falling consumer demand, an...
CFO StaffJune 7, 2006

Chief financial officers are growing more pessimistic about the U.S. economy but still plan to increase capital spending and hiring this year. Their expansion plans will be in substantial jeopardy, however, if inflation, the federal funds rate, or the price of oil continues to rise.

Those are some of the findings of the June 2006 Duke University/CFO magazine Business Outlook survey, which asked finance chiefs from a broad range of public and private companies worldwide about their expectations for the economy. This latest quarterly survey was concluded June 1 and generated responses from 980 CFOs, including 584 from the United States, 215 from Asia, and 181 from Europe. (The survey of European CFOs was conducted jointly with Erasmus University RSM in the Netherlands; results cited here are for the U.S. businesses, unless stated otherwise.) Detailed results are available at

The study’s main findings:

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

Download our 2022 survey report for a high-level view of finance team projections and strategies, directly from our executive readers.

• Only 24 percent of CFOs are more optimistic about the U.S. economy, compared with 42 percent last quarter;

• 49 percent are more optimistic about their own companies, however, suggesting the pressures facing the economy have yet to affect most firms directly;

• Rising wages, falling consumer demand, and increased fuel costs top CFOs’ lists of concerns;

• Finance chiefs say their bottom lines will suffer if core inflation rises to 3.5 percent, the federal funds rate goes above 5.5 percent, or if the price of oil surpasses $75 a barrel;

• Companies will increase capital spending 7.5 percent over the next 12 months — an increase from last quarter, when CFOs predicted a rise of 6.5 percent;

• Earnings are expected to increase 10.4 percent over the coming 12 months;

• Corporate cash balances will grow another 2.1 percent.

Business optimism about the U.S. economy declined sharply. Only 24 percent of U.S. finance chiefs are more optimistic than they were last quarter, while 46 percent are less optimistic. At the same time, CFOs’ optimism about their own firms remained fairly steady; 49 percent were more optimistic and 28 percent, more pessimistic.

“CFOs are telling us that we are moving closer to the danger zone for the U.S. economy but that their firms can ride it out for now,” said John Graham, a professor of finance at Duke’s Fuqua School of Business and director of the survey. “There are several risk factors that are near the tipping point, and if any of them worsens, it would heighten the risk of a corporate slowdown.”

Inflation and wages are also worrisome. U.S. companies expect to increase their prices by 3.1 percent over the next 12 months. This would put the U.S. economy dangerously close to 3.5 percent inflation, the level at which a majority of CFOs say their bottom lines would begin to suffer. Trouble may arrive even sooner as a result of oil prices; finance chiefs say prices above $75 per barrel will harm profits.

They have similar concerns about the federal funds rate. “CFOs don’t want any more Fed hikes,” said Campbell Harvey, founding director of the survey and a finance professor at Duke. “The CFOs have drawn a line in the sand. Rates above 5.5 percent will be damaging, and rates above 6 percent would cause substantial damage to their bottom lines. The Fed does not have much wiggle room left.”

CFOs cited rising labor costs as their No. 1 concern for the first time in the history of the survey. The second highest-rated risk facing the corporate sector is waning consumer demand, followed closely by rising fuel costs, increasing interest rates, a shortage of skilled labor, and high health care costs. Asian corporate concerns are similar, but with more emphasis on consumer demand and fuel. European CFOs list high wages and salaries at the top of their concerns, followed by waning consumer demand.

“The risk posed by rising health-care costs has not gone away, but companies now have bigger worries,” said Don Durfee, research editor at CFO magazine. “Rising wages and salaries are a problem because CFOs tell us that they can only pass along about 40 percent of increases in employment costs. Similarly, on average only about half of rising commodity prices show up in the final prices of the products that their companies sell. The companies have to eat the rest.”

Though they are concerned about the economy, U.S. corporations are still planning capital and workforce expansions. Capital spending is expected to increase 7.5 percent during the next 12 months, up from 6.5 percent last quarter and 5.7 percent six months ago.

Three companies in five expect to hire more employees this year, with the overall increase averaging 1.3 percent; only one in five expects to reduce employment. The employment picture is much worse in Europe, where domestic employment is expected to decline by 1.4 percent.

4 Powerful Communication Strategies for Your Next Board Meeting