The Economy

Profits Up, Jobs Flat

U.S. finance chiefs see robust earnings growth and weak hiring ahead, according to the latest Duke/CFO Outlook Survey.
David W. OwensFebruary 1, 2014

Optimism in the U.S. business environment was stuck in something of a holding pattern at year-end, but at least it was heading in the right direction, according to the results of the Duke University/CFO Magazine Global Business Outlook for the fourth quarter of 2013. In this quarter’s survey, we polled 400 finance leaders at U.S. companies of all sizes, as well as more than 600 executives from other regions of the world. U.S. finance executives maintained a reasonably positive opinion of the underlying economy, and continued to have confidence in their own businesses. But the survey also showed that this confidence doesn’t always translate into improved prospects for employment — especially in light of uncertainties over the impacts that implementation of the Affordable Care Act (ACA) might have.

CFOs in the survey gave their optimism in the U.S. economy a relatively strong rating of 57.2 out of 100. While this represents a decline of a percentage point over the Q3 2013 view, it remains high enough to suggest that U.S. finance leaders continue to be more bullish than bearish about the economy’s prospects.

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Revenues and earnings are both expected to grow moderately throughout 2014, and U.S. companies will continue to invest in their businesses. Revenue expectations took another tick upward from the previous quarter — rising to 8.3% over the next year — while the outlook for growth in capital spending continued to hover around 6% annually.

U.S. public companies had an even stronger outlook for earnings growth, building on a jump first witnessed in the third quarter when U.S. expectations for earnings outstripped those of fast-growing Latin American companies for the first time in 2013. In the fourth-quarter survey, U.S. finance chiefs from public companies were looking for earnings growth of 14.3%, on average, through next year. Latin American expectations subsided somewhat from their mid-year peak, and finance executives from that region anticipated earnings would grow by 8.5% in 2014.

14Feb_Outlook_p50aBut hopes for better financial performance may not be enough to support a rebound in employment at U.S. companies. Finance executives anticipate that their firms will be making some hires over the next 12 months, but not at a pace that is likely to make much difference in national unemployment figures. Expectations for both full-time and temporary employment growth in 2014 remained subdued at around 1.5%. While the economic recovery may not be a completely jobless one, as some had feared, these results suggest many companies are pulling back on the reins.

Caring About Health Care
The results from this quarter’s survey also suggested that the employment scene is not likely to be helped much by the anticipated implementation of the ACA. Survey responses indicated that finance executives are still sorting out what consequences the act may have on employment strategies, and they are considering a range of possible reactions. While respondents largely were unwilling to say outright that employee numbers would go down as a result of health care reform, the survey provides some evidence that companies will be “much more cautious in hiring due to health care costs,” as one respondent wrote. Potential responses could include delaying hires, cutting some employee hours to below the 30-hour-a-week threshold that triggers benefits, or hiring more workers at reduced hours.

The smaller companies in the survey — those with less than $100 million in revenue — appeared to be more vulnerable to the fallout. Half of the respondents from these companies said that as a result of the ACA, they would consider either switching some employees to fewer than 30 hours per week or hiring new employees who work fewer than 30 hours. Only a third of those from companies larger than $100 million expressed the same sentiment.

A more common effect at companies of all sizes is likely to be the acceleration of recent trends in benefits management in response to skyrocketing health care costs. In the Duke/CFO survey, two-thirds of the finance executives reported that their companies would at least consider changing health benefits as a result of the ACA. Of these companies, the largest number (70%) may look at reducing health benefits to current employees, and the next largest number (60%) could consider increasing either employees’ or retirees’ contributions toward health benefits. Retiree benefits are more likely to remain untouched, but a distressingly large minority of respondents (27%) said that their companies could end up eliminating their health plans altogether.


However, as a treasurer in the retail industry noted in the survey, many companies are still trying to figure out the impact of health care reform. “We may have to increase the company contribution to health care benefits,” he concluded, but others attempted to place the new health care requirements in context. As the CFO of a professional services firm wrote, “the ACA is but one factor in health care benefit levels,” while a senior vice president for finance and administration makes the point that “the benchmark for benefits is competition, not the ACA.”

Mark Verbeck, CFO at Coupa Software, a provider of spend-management software, agrees that competitive demands trump benefit costs for now, at least in the high-tech sector. “The need to continue attracting employees in a competitive environment would make the company unlikely to increase the employees’ burden,” says Verbeck. What worries him more, he says, is the excise tax that will be imposed starting in 2018 on high-cost health care plans (the “Cadillac Tax”), the plans with the most generous benefits.

“Depending on how the Cadillac Tax shakes out, it might impact how we have to design our plan,” says Verbeck. “I think we probably will want to strive to avoid the tax, so we’ll have to see what we could do to structure the plan so that we are right at the limit.”

In this regard, Verbeck is following a path similar to the one advocated in the Outlook Survey by a finance director from a midsize services company, who said the company would be “adjusting” health benefits, as opposed to either increasing or reducing the level of benefits offered.

Global Roundup
Survey results from other regions of the world were mixed, but primarily positive. Finance executives in Asia showed a decided rebound in their outlooks. In the previous quarter, they expected earnings to take a dip into the negative; now, they are targeting growth of 7% or more in both earnings and revenue over the next 12 months.

European respondents again brought up the rear, expecting earnings to grow by only 2.3% (for public companies) and revenues by 2.8% (for all companies, including private). However, given that economic recovery in Europe has been lagging that in the U.S. and other regions by six months or more, this sluggish pace could be expected.

Potentially more troubling in Europe is the fact that expectations for capital spending, product pricing, and full-time employment all fell into the negative this quarter. The falloffs may be reflecting European finance executives’ recognition that belt-tightening will still be needed in the face of painfully slow economic recovery. But despite all this, European finance executives appear to see at least a dim light at the end of the tunnel, with 45% reporting that they are more optimistic about their individual economies than they were last quarter, and only 18% saying they are less optimistic.


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