The Economy

CFOs’ Optimism at 5-Year Low

Concerned about weak consumer demand, CFOs are worried about the U.S. economy and predict that a recession is imminent.
Sarah Johnson and Don DurfeeSeptember 13, 2006

Financial executives’ attitude on the U.S. economy has gone downhill. In the midst of weakening housing prices and consumer demand, plus concern about fuel costs, labor costs, and interest rates, nearly 50 percent of CFOs are more pessimistic about the economy than they were three months ago. This pessimism is the highest it’s been in more than five years, according to the latest results of the quarterly Duke University/CFO Business Outlook Survey.

Although one-third of the CFOs surveyed predict a U.S. recession in the next year, they are relatively upbeat about the prospects for their own companies. Nearly 46 percent are more optimistic about their companies’ prospects compared to last quarter, but only 19.8 percent are more optimistic about the U.S. economy. Still, both numbers showed a decline from when the survey was last taken, at the beginning of the summer.

CFOs are blaming a weakening consumer demand for their pessimism. For the first time in the survey’s 10-history, financial executives listed consumer demand as their number-one concern, followed by rising labor costs. If consumer demand weakens any more, 34 percent of CFOs will cut back on hiring, and 29 percent will cut back on capital spending.

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“We have moderate hiring and capital spending plans,” said one of the survey respondents, Clay Hale, vice president of finance for Siemens Energy and Automation division, in an interview with CFO. “They’re higher than they’ve been, but we need to remain flexible. We don’t want to be in a situation where we have to start laying people off if the economy slows down.”

Despite their lack of confidence in the U.S. economy, companies continue to generate more cash, and CFOs expect to have a strong year. They predict they will have a 3.3 percent growth of cash on their balance sheets in the next 12 months. This is an increase over last quarter, when a 2.1 percent growth was expected for the same time period. They also expect earnings to grow 9.4 percent over the next year. Last quarter, they predicted a 10.4 percent increase in earnings.

But companies also face risks that have financial executives worried — respondents singled out labor costs and interest rates as two of their top concerns. Some CFOs, mainly in the consulting, construction, and high-tech sectors, point to the lack of skilled labor as a reason for wage inflation; on average, companies plan to raise wages and salaries 3.5 percent in the next year. And almost 46 percent of CFOs doubt that the Federal Reserve’s tightening will reduce the rate of inflation. Twenty-one percent want the Fed to cut interest rates.

The September 2006 survey includes responses from 571 U.S. CFOs from public and private companies. Duke and CFO also surveyed 208 CFOs from Asia and 180 from Europe. Asian companies predict a 16 percent increase on capital spending in the next year, and European companies expect a 6 percent growth in the same time period.

European CFOs show more optimism than their U.S. counterparts. Comparing their attitudes to last quarter, 43 percent said they are more optimistic about their countries’ economies, and 54 percent are more optimistic about their companies’ future. They could adopt the U.S. CFOs’ attitudes, though, if the U.S. economy doesn’t show improvement: Thirty-four percent predict that a U.S. recession could slightly hurt the European economy, 55 percent said it would have a medium impact, and 7 percent said it would be very damaging.