The Economy

CFOs’ Optimism Plummets to Six-Year Low

Finance executives blame their more pessimistic attitudes on weak consumer demand, wage inflation, and problems in the credit market.
Sarah JohnsonSeptember 11, 2007

CFOs’ optimism about the U.S. economy has taken a nosedive. In fact, it has sunk to the lowest level on record, according to the latest results of the quarterly Duke University/CFO Business Outlook Survey.

Nearly two-thirds of CFOs are feeling more pessimistic this quarter than they did three months ago, the survey of 580 U.S. finance executives says. Only 13.6 percent of the survey respondents reported feeling more optimistic than last quarter. Those numbers reflect a six-year nadir, the lowest level since the survey began in June 2001. “With pessimists greatly outnumbering optimists, the prospects for the U.S. economy are very poor, with a recession a distinct possibility,” said John Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business.

Those executives revealed why their expectations are so bleak: they expect slow growth in earnings, capital spending (3.2 percent over the next year), and acquisitions, and no growth at all in hiring. And they’re worried about higher labor costs and weak consumer demand. “CFOs see a gathering storm that includes slashed advertising spending, slow tech spending, and the most lethargic employment picture in four years,” says Campbell Harvey, another Duke professor.

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Also causing worry are the recent repercussions from the so-called credit crunch. The problems in the credit markets rank among CFOs’ top anxieties. Of the 26.9 percent who said they’ve been directly affected by the recent turmoil, more than half reported seeing a higher cost of credit and 33 percent say credit is becoming harder to come by. As a result, nearly one-third have cut back on their capital spending plans and 16 percent have reduced their hiring plans.

The credit problems have extended to another area as well — mergers and acquisitions. The majority of companies are blaming the recent downturn in M&A activity on the tight credit markets. More than 60 percent say M&A activity will slow down because of the higher cost of borrowing money.

To be sure, CFOs aren’t in full agreement over whether there is a slowdown — while nearly three-fourths expect M&A activity to slow during the rest of the year, half believe that the downturn has already begun. Still, those numbers are in stark contrast to the data collected during the summer when 87 percent of the respondents predicted 2008 would be a strong year for deals.

CFOs’ optimism about their own companies has also fallen. Barely 40 percent of CFOs said they feel more optimistic about their company’s financial outlook this quarter, down from 49 percent in March.