The Economy

Feeling for the Bottom

CFOs shift their expectations for a recovery to a later date as more companies report feeling the pinch of the credit crisis.
Tim ReasonSeptember 9, 2008

CFOs predict job cuts and scant capital spending throughout the remainder of 2008 and the first half of next year, with most CFOs thinking a recovery is not likely to begin until next summer at the earliest, according to the results of the latest quarterly Duke University/CFO magazine Global Business Outlook survey.

The third-quarter survey found that CFOs expect to increase capital spending only 0.6 percent over the next 12 months, while they expect to reduce their domestic workforce by 1.6 percent. At the same time, they reported, the prices of their own companies’ products will rise by 3.6 percent.

If there was any good news in the survey, it was that most CFOs expected modest earnings growth of 5.5 percent, an improvement from last quarter’s expectation of 3 percent growth. Likewise, the current survey saw an easing of CFO concerns over fuel prices, which topped the list last quarter.

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The survey, which collected responses from 1,299 CFOs at a range of public and private companies, has been conducted for 50 consecutive quarters.

Although the survey was conducted before the government’s surprise takeover of Fannie Mae and Freddie Mac this past weekend, nearly 70 percent of the CFOs responding said they approved of some kind of government intervention regarding the two lending giants. By contrast, only 39 percent said they approved of the government’s actions in the case of Bear Stearns.

The biggest concern for CFOs continues to be weak consumer demand. And indeed, even as CFOs worried about domestic consumption, the strengthening dollar and growing economic alarm abroad made it increasingly unlikely that U.S. export growth could continue to sustain the U.S. economy. Optimism fell to a four-year low among CFOs in Europe, where pessimists outnumbered optimists by a 7-to-1 margin. Likewise pessimists outnumbered optimists by 2-to-1 in Asia and 5-to-1 in China.

The state of the credit markets was also high on the list of CFO worries. The credit crunch appears to be directly hurting more firms than last quarter, with 69 percent of firms rated B or lower saying they have been directly affected and have seen the cost of credit increase by 110 basis points. Among all CFOs who said their companies had been hurt by the credit crunch, 60 percent said credit was hard to find, 53 percent said their borrowing costs had increased (by an average of 102 basis points), and 29 percent said they have had problems arranging a line of credit.

Respondents also seemed to have shifted their expectations for the beginning of recovery in the U.S. economy. In the previous survey, 41.5 percent said they expected a recovery to begin in the first half of 2009. Only 21 percent thought it would begin in the second half. In the current survey, the number expecting no start to a recovery until the second half of 2009 rose to 36.6 percent. The number predicting it would not begin until 2010 or later rose slightly, from 9 percent last quarter to 10.7 percent.