The Economy

Baby Steps

CFOs report early signs of recovery, but the employment outlook remains bleak.
Kate O'SullivanDecember 16, 2009

The economic recovery is shaping up to be a jobless one, judging by the response of finance chiefs to this quarter’s Duke University/CFO magazine Global Business Outlook Survey. While CFOs say they will increase capital expenditures and technology spending in the next 12 months — the first positive numbers in these categories in a year — they note that employment at both U.S. and European companies will continue to decline.

Nearly three-quarters of finance chiefs say they have made layoffs in the past 20 months, while 60% have eliminated or reduced overtime, 42% have reduced hours, 40% have reduced wages, and 31% have furloughed employees. Among those who took such actions, few expect to reverse them in 2010.

Finance executives fear that the deep cuts they made in the face of the economic crisis are not without consequences: 46% say they have taken actions since the beginning of the recession that they believe could reduce their company’s long-term growth prospects. “We’ve cut our workforce very deeply, and if there is a bounce-back, we wonder whether we will be able to handle it with the level of service that we pride ourselves on,” says Jim Toohey, CFO of Direct Group, a New Jersey–based direct-marketing firm. In addition to worrying about the ability to handle new business should it materialize, finance chiefs are concerned about their remaining employees. Thirty-six percent say morale among their employees is fair or poor, compared with just 6% who say morale was at those levels before the recession began.

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Tight credit continues to affect a significant number of companies, with 43% of CFOs reporting their banks are less willing to lend today than they were prior to the collapse of Lehman Brothers in September 2008. The same number say they have passed up attractive investment projects because of the inability to access credit. Significantly more conservative lending standards pose the biggest obstacle to obtaining credit, say finance chiefs.

Still, nearly half of the 567 U.S. CFOs who responded to the survey say they are more optimistic about the economy than they were last quarter, a dramatic increase from a year ago, when just 9% were more optimistic, though down slightly from last quarter. Finance chiefs also report plans to slightly increase marketing and advertising budgets and research and development spending in the coming year. Earnings, they predict, will grow by 7% on average in 2010.

“We’ve seen some stability in our business,” says Jon Biro, finance chief at Consolidated Graphics, a commercial printing company based in Houston. “It’s too early to say whether we’ve turned the corner, but we’re no longer feeling like we’re falling off a cliff.” He says his company has continued to invest in technology throughout the downturn and has kept its mergers-and-acquisitions team intact, although there were layoffs elsewhere in the business. Despite what Biro calls “a depression” in the commercial printing sector, he says he sees opportunities to further consolidate the fragmented industry and gain market share during the recovery.

The problem for Biro, and for Corporate America, is that widespread uncertainty remains about whether a recovery has truly begun — and if it has, how sustainable and robust it will be. “The implications of not knowing are that people tend to be very conservative,” says Biro. “We’re not hiring. We’ve cut salaries and wages, and we’re not going to restore those cuts until we see a sign that business is growing.”