The Economy

Darkness Visible: CFOs See Recession Through 2009

The outlook isn't brilliant among U.S. finance chiefs studied by CFO magazine and Duke University: 75 percent see a recession starting sometime thi...
David KatzMarch 12, 2008

The news is getting grim. Optimism among U.S. CFOs has plummeted this quarter, with three-quarters of them predicting a recession at some point during 2008. Even grimmer: They expect inflation will rise to 3 percent this year. Grimmest: Nearly 90 percent say the economy will not rebound until 2009.

Those are some of the conclusions of the first quarter 2008 Duke University/CFO magazine Global Business Outlook survey, which culls the economic prognoses of more than 1,000 CFOs from a broad range of global public and private companies. The survey concluded March 7 and generated responses from 1,073 CFOs, including 475 from the United States, 205 from Europe, 204 from Asia (not including China), and 189 from China. Here are some more highlights—or lowlights—of the U.S. CFOs’ responses:

•Fifty-four percent say the United States is now in recession.

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•Optimism reached its lowest point since the study launched it optimism index six years ago. Pessimists outnumber optimists by a nine-to-one margin, with 72 percent of finance chiefs more pessimistic than about the U.S. economy they were last quarter. Just 8 percent more optimistic.

•Weak consumer demand and turmoil in the credit and housing markets are the top macro-concerns of top finance executives. The high cost of labor ranked as the top internal concern.

•Credit conditions have directly hurt 35 percent of companies through decreased availability of credit and higher interest rates (up 118 basis points on average). Sixty percent of the companies have put off expansion plans in response to credit market unrest.

• The CFOs expect capital spending to increase only 3.3 percent, while price inflation rises 3 percent over the next 12 months.

• Only 13 percent think the U.S. economy will hit bottom and begin to rebound in 2008. Another 40 percent say the rebound will occur in the first half of 2009, while 47 percent feel recovery is more than 15 months off.

The Fed’s interest-rate cuts have failed to influence business confidence, contended Campbell Harvey, a Duke professor and founding director of the survey, which has been conducted for 48 straight quarters. “Seventy-four percent of CFOs say the Fed cuts have had no impact on their business. Clearly, the Fed needs to switch to Plan B,” he said.

Harvey added: “Looking at the components of the survey, there are three particularly discouraging pieces of information: capital spending has been scaled back to a ‘maintenance’ level; there is no significant employment growth; and inflation is rearing its ugly head. Stagflation – slow economic growth and rising unemployment combined with inflation – could plague the slowdown.”

With prices falling, however, the corporate sector should remain active in mergers and acquisitions, researchers say. Thirty-seven percent of U.S. companies represented in the survey plan to make an acquisition during the next 12 months. Nearly one-third planning an acquisition say they will buy a whole company or companies.

For their part, European CFOs are gloomier. In the past quarter, 60 percent of the 205 European CFOs responding have grown more pessimistic about the economies of their own countries relative to the previous quarter. Just 10 percent have grown more optimistic. At the same time, European finance chiefs expect employment to fall 0.3 percent.

But the pessimism is not as acute as it is among U.S. finance chiefs. Only 24 percent of European CFOs think their country is in recession. What’s more, they expect European tech spending is expected to rise by 8.8 percent

The mood in Asia appears mixed. While 43 percent of the 204 respondents are becoming more pessimistic about regional economic growth than they were last quarter, 38 percent are growing more optimistic. On average, the sample feels that domestic employment should increase 8 percent this year, capital spending will jump 20 percent on average, and that wages will rise by nearly 10 percent.

Seventy percent of Asian CFOs think the U.S. economy is in recession, and 50 percent think that this will have a meaningful negative impact on their firm’s earnings. Nevertheless, 64 percent expect their own-country domestic demand to help replace U.S. demand, and 39 percent expect Pacific Rim demand to help.

Asian CFOs have a distinctly Democratic leaning when it comes to U.S. presidential politics, according to the survey. Forty-nine percent of Asian CFOs favor Barack Obama, 37 percent like Hillary Clinton, and 8 percent like John McCain.

Among the 189 CFOs from China, two-thirds are worried about a U.S. recession stemming from mounting profit-margin pressure and decreased exports. Forty percent have become more pessimistic about Chinese economic growth than last quarter, while the mood of only 26 percent has brightened.