CFOs don’t foresee a double-dip recession, but doubts about the strength of the economy have pessimists outnumbering optimists by more than 5 to 1 in the U.S. Business spending is expected to grow, though more slowly than last quarter, and hiring will continue at a sluggish pace.
These are some of the findings of the most recent Duke University/CFO Magazine Global Business Outlook Survey. The quarterly survey, which concluded Sept. 9, asked 996 CFOs from a broad range of global public and private companies about their expectations for the economy.
The research has been conducted for 62 consecutive quarters, making it one of the world’s most comprehensive and longest-running surveys of senior finance executives. Presented results are for U.S. firms unless otherwise noted.
Top Concerns
Even with some positive signs in capital spending and hiring, optimism among U.S. CFOs fell dramatically this quarter, with 65 percent saying they have grown more pessimistic and only 12 percent growing more optimistic about the outlook for the U.S. economy. This is much worse than last quarter, which saw an even split between optimists and pessimists.
“This significant drop in optimism is being driven by a number of deep concerns: continued weak consumer demand, intense price pressure, and uncertainty about government policies and global financial instability,” said Kate O’Sullivan, deputy editor at CFO Magazine.
CFOs also cited the continued high cost of health care, maintaining employee morale, and hiring and retaining highly skilled employees among their top concerns for their companies.
Spending and Cash Holdings
Firms plan to increase capital spending by 4.5 percent over the next 12 months, down from 9 percent in last quarter’s survey and 12 percent six months ago. Spending on research/development and marketing/advertising are expected to grow about 2.5 percent.
“Capital spending had been a primary driver of growth in this tepid economic recovery,” said Campbell Harvey, a professor of finance at Duke’s Fuqua School of Business and founding director of the survey. “Looking forward, 4.5 percent growth in capital spending is not bad, and certainly does not indicate an imminent recession.”
In the past six months, one-third of U.S. companies say they have delayed or canceled previous plans for capital spending, citing U.S. and global economic uncertainty, lack of access to sufficient funding, weak demand and the regulatory environment.
“Rather than spend, many companies say they will hold onto their hoards of cash,” said John Graham, a professor of finance at Fuqua and director of the survey. “While building up and holding onto cash balances may be prudent for any one company, it limits potential growth in the overall economy.”
Fifty-seven percent of firms say they will not deploy their cash holdings this year, up from 50 percent nine months ago. CFOs’ increased hoarding is based on concerns about credit markets potentially tightening again, economic uncertainty and a lack of attractive investment opportunities, according to the survey.
Employment
U.S. companies expect domestic employment to increase by 0.9 percent over the next year. This rate of growth is up slightly from last quarter and implies that, over the next year, the U.S. economy will create about 100,000 new jobs each month.
“The U.S. economy needs to create 100,000 jobs per month just to keep up with labor force growth, meaning we are stuck at 9 percent unemployment for the next year,” said Graham. “While the employment situation is stagnant, I expected the jobs outlook to be worse, given the extreme drop in optimism and reduced spending plans.”
About 29 percent of firms say they pulled back on previous plans to hire. Among these companies, the top reasons for reducing employment plans are the extreme uncertainty about the U.S. economic outlook, lack of available credit, weak product demand and having learned how to operate with fewer employees. The remaining 71 percent of companies went ahead with their hiring plans this year.
“Expected gains of 0.9 percent in hiring and 4.5 percent in capital spending signal slow to moderate economic growth,” Harvey said. “While optimism is lower, two-thirds of CFOs are sticking with their spending and hiring plans.
“These plans, plus double-digit dividend growth, are inconsistent with a recession mentality. If CFOs thought a recession was forthcoming, we would see capital spending and employment growth in negative territory.”
