The Economy

CFOs Are Shaky at the Cliff’s Edge

Finance chiefs are less optimistic than they were last quarter and urge compromise on the fiscal cliff.
Kate O'SullivanDecember 12, 2012

The U.S. CFO Optimism Index has dropped yet again in the latest Duke University/CFO magazine Global Business Outlook Survey, to 51 out of 100. Down from 52 last quarter and 59 at the beginning of the year, optimism levels among senior finance executives have dipped in part because of mounting concern about the fiscal cliff. Worries about consumer demand and federal government policies also rate as top concerns in the survey, now in its 67th consecutive quarter.

“I’m not as optimistic as I was three months ago,” says Hugh Regan, CFO at InTEST, a publicly traded maker of semiconductor testing equipment. “I’m really concerned about our elected representatives. I’m sick and tired of all the partisanship. We need to raise taxes and cut spending and cut entitlements. Let’s just do this and get ourselves on the road to having our house in order. Households do this all the time. Businesses do this all the time. Why can’t Washington?” In addition to the impact of economic uncertainty on businesses, Regan says he fears the blow to consumer confidence.

Many of his fellow finance chiefs agree, with 63% saying they would like to see a deficit-reduction proposal along the lines of Simpson-Bowles, which combines spending cuts with tax increases. Thirteen percent call for a more aggressive plan, with measures like eliminating deductions to raise revenue more quickly. Just 10% say they’d like a short-term compromise that avoids the fiscal cliff but does not reduce the deficit.

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Thirty-nine percent of the 411 U.S. CFOs responding to this quarter’s survey say it is likely or very likely that the United States will go over the fiscal cliff in January by failing to reach a deficit-reduction deal and triggering automatic government spending cuts and tax increases. Forty-four percent say it is unlikely or very unlikely, and 17% won’t hazard a guess. A majority of finance chiefs — 67% ­— say their company will be worse off in 2013 if the government fails to make a deal.

If the automatic cuts and increases kick in, 67% of CFOs say they will reduce capital spending for 2013, and 70% say they will reduce hiring. In contrast, under a Simpson-Bowles plan or something similar, just 18% say they would reduce capital spending for the year and 20% say they would reduce hiring.

The uncertainty about the fiscal cliff and the economic environment globally continues to make planning a major challenge for CFOs. Says Regan: “In our business, we usually have three months clear visibility and another three months of foggy visibility. Now, I joke that I can’t see to the end of the parking lot.”

Jim Ciaramella, controller at Lasco Engineering Services in Michigan, says he expects the economy to “continue to bump along,” but adds that his company is forecasting some sales growth and plans to add staff as it expands into new market segments.

On average, U.S. finance chiefs say they expect capital spending at their company to increase by just 3% in the next 12 months, down from 4% last quarter, in the fourth consecutive quarter of declining spending expectations. CFOs plan to cut research and development spending by 1% and will increase spending on technology by only 2% in the coming year. Advertising and marketing spending will also increase by just 2%, another decline from last quarter.

Hiring expectations are equally restrained, with U.S. finance chiefs planning to expand full-time staff by a meager 0.1% in the coming year. CFOs plan to cut back on temporary staff and will increase their offshore outsourced workforces by only 0.5%. Should these predictions hold true, notes John Graham, finance professor at Duke’s Fuqua School of Business and the director of the survey, the unemployment rate will rise, as workers will be entering the job market in greater numbers than companies will be hiring.

Finance chiefs also plan to keep a tight rein on employee-benefit spending in 2013, with many of those who reduced benefits during the recession saying they haven’t yet restored them to their prerecession levels. Eighty-four percent of CFOs say their company will not be contributing to health-care benefits at prerecession levels in 2013, and 41% say employees are still working fewer hours than they were prior to the recession. In one bright spot for workers, 83% of CFOs report that their companies will pay bonuses this year, although they’ll be smaller than they were last year at 40% of those companies.