The Economy

That Sinking Feeling, Again

The latest Duke/CFO survey shows CFOs' optimism about the economy declining to recession levels.
Julia HomerSeptember 22, 2010

Optimism about the U.S. economy has fallen back to recession levels among U.S. chief financial officers, despite the fact that they expect earnings to grow by 12% in the next 12 months and capital spending to increase by 7%.

According to the latest quarterly Duke University/CFO Magazine Global Business Outlook Survey, which polled 937 CFOs in early September, only 14% of U.S. CFOs are more optimistic about the economy than they were last quarter, while 57% are less optimistic. This puts the optimism level at 49 (on a scale of 0 to 100), a result not seen since the first quarter of 2009, when CFOs rated the economy at 40.

Furthermore, half the CFOs say there is only a 6-month window — and a quarter believe it’s a 12-month window — during which they can maintain current levels of business activity without improvement in the overall economy.

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Blame the twin demons of unemployment and (lack of) credit. Thirty percent of CFOs say borrowing has become more difficult than it was a year ago, compared with 25% who say borrowing is easier. “There has been no progress in fixing the credit problem over the last year,” says Campbell R. Harvey, a professor of finance at Duke’s Fuqua School of Business and founding director of the survey. “Indeed, half of the small businesses say credit conditions are worse than in 2009.”

He continues, “The math is simple. A, banks are sitting on cash because of their poor health and general uncertainty. B, small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C, in usual circumstances, small and medium-sized businesses account for the majority of employment growth. A plus B plus C implies we are stuck at 9% or 10% unemployment.”

Despite the relatively strong earnings and capital-spending expectations, CFOs expect employment to increase by only 0.7%, not enough to reduce unemployment. Moreover, nearly one-fourth of recent hiring has been targeted at contract and part-time employees, up from 17% prior to the recession. Such numbers translate into reduced consumer demand, which finance executives once again cite as their top external concern.