Survey: CFO Optimism Plunges to Record Low; Capital Spending and Hiring to Stagnate; Consumers, Wages, and Credit Markets are Big Concerns
Global CFO Survey: Executive optimism at record low, capital spending to slow
For additional
comment, contact Duke’s John Graham at (919) 660-7857 or john.graham@duke.edu or CFO magazine’s
Kate O’Sullivan at (617) 345-9700 (x214) or kateosullivan@cfo.com.
For commentary about European results, contact Janet Kersnar
at +44 0 20 7576 8100 or janetkersnar@cfoeurope.com or
Erasmus’s Kees Koedijk at +31 10 40 82748 or ckoedijk@rsm.nl.
For commentary about Asian results, contact Don Durfee at +852
2585 3275 or dondurfee@economist.com. For commentary about Chinese
results, contact Chen Wu at +86-21-64737128 ext 24 or chenwu@economist.com.
September 11, 2007 | DURHAM,
N.C. –- Optimism about the U.S. economy plunged to a record
low this quarter among chief financial officers. CFOs expect
slow growth in earnings, capital spending and acquisitions and
no growth in hiring. They are very concerned about weak consumer
demand, rising labor costs and credit markets.
These are some of the conclusions of the September 2007 Duke
University/CFO Magazine Business Outlook survey, which
asked CFOs from a broad range of global public and private companies
about their expectations for the economy. The survey, concluded
Sept. 7, generated responses from 1,316 CFOs, including 580 from
the U.S., 181 from Europe, 175 from Asia (not including China),
and 380 from China. The survey of European CFOs was conducted
jointly with RSM Erasmus University in the Netherlands. Results
in this release are for U.S. companies, unless otherwise noted.
SUMMARY OF SURVEY FINDINGS:
- Optimism reached its lowest point since the optimism index
launched six years ago. Pessimists outnumber optimists by roughly
a four-to-one margin, with 61.7 percent of CFOs more pessimistic
and only 13.6 percent more optimistic about the U.S. economy
than they were last quarter.
- Capital spending is expected to
increase only 3.2 percent, and domestic employment will be
flat, though outsourced employment should rise 5.9 percent.
- Weak consumer demand, high labor costs and credit market
turmoil rank among the top concerns of CFOs.
- The mergers and
acquisitions boom will wither due to tighter and more expensive
credit and weaker economic growth; there will be a shift away
from private equity buyers toward corporate acquirers.
- Companies
are shrugging off Chinese product safety concerns and International
Financial Reporting Standards (IFRS) accounting standards.
PESSIMISM ABOUT U.S. ECONOMY
Pessimism about the U.S. economy increased dramatically, with
pessimists far outnumbering optimists. The CFO optimism index
for the U.S. economy, begun in June 2001, reached its lowest
level ever. (See chart at end of release).
“The optimism index reached a record low, far lower than we
have observed previously,” said John R. Graham, director of the
survey and a finance professor at Duke’s Fuqua School of Business.
“With pessimists greatly outnumbering optimists, the prospects
for the U.S. economy are very poor, with a recession a distinct
possibility. The CFO optimism index has a track record of accurately
predicting future capital spending, employment and earnings.”
CFOs’ optimism about their own companies also fell. This quarter,
39.5 percent of CFOs report they are more optimistic about their
own company’s financial outlook (down from 49 percent in March),
while 30 percent of CFOs are more pessimistic about their own
firms’ financial prospects.
WEAK CONSUMER DEMAND, LABOR COSTS, CREDIT MARKETS TOP CORPORATE
CONCERNS
Wage inflation and concerns about weak consumer demand continue
to top the list of CFO worries. Wage inflation is the No. 1 concern
among U.S. businesses, followed closely by concern about the
effects a slowing economy will have on corporate profitability.
CFOs are also very concerned about credit markets. More than
a quarter (26.9 percent) of companies say they have been directly
affected by recent credit market unrest. Among those affected,
57.8 percent say they have experienced an increased cost of credit
(with the average increase being 72 basis points) and 33.1 percent
say credit has become less available.
FED POLICY
The survey links potential Fed actions at the Sept. 18 Federal
Open Market Committee meeting to corporate borrowing. “Cutting
the Fed Funds rate by 50bp is not a panacea to the corporate
borrowing problems,” said Duke professor Campbell R. Harvey,
founding director of the survey. “Forty-five percent of CFOs
say that a 50 bps drop will not help their ability to borrow,
and another 37 percent say that it would only help a little.”
MERGER-AND-ACQUISITION ACTIVITY
Nearly three-fourths of CFOs expect that M&A activity will
slow in 2007, with half of firms acknowledging that the slowdown
has already begun. Just last quarter, the majority of CFOs expected
M&A to stay strong through the remainder of 2007.
“Credit market turmoil is driving the M&A slowdown,” said
Kate O'Sullivan, staff writer at CFO magazine. “A full
86 percent of corporations tell us that tight credit markets
will slow M&A, with 63 percent saying that the increased
cost in particular will dampen M&A. Another 34 percent of
the respondents say that slowing economic growth, itself likely
brought on by tight credit markets, will slow merger and acquisition
activity. We also expect to observe a shift away from private
equity buyers towards corporate acquirers.”
CHINESE PRODUCT SAFETY, INTERNATIONAL ACCOUNTING STANDARDS,
PRESIDENTIAL CHOICE
US companies are shrugging off recent concern about Chinese
products, with 92 percent saying they are not reevaluating their
supply chain in response.
Only 14 percent of US CFOs say they are very familiar with International
Financial Reporting Standards (IFRS), and fewer than 10 percent
say they are very likely to file under IFRS if given the choice.
Twenty-seven percent of CFOs say they would vote for Rudy Giuliani
for president, 17 percent for Mitt Romney and 13 percent for
Hillary Clinton.
RESULTS UNIQUE TO EUROPE
European optimism sank this quarter. Thirty-seven percent of
European CFOs have grown more pessimistic about the economies
of their own countries relative to last quarter, and only 26
percent have grown more optimistic.
European employment is expected to remain flat and capital spending
should increase by about 7 percent. The cost of labor is the
No. 1 corporate concern in Europe, with skilled-labor shortage
No. 2 and weak consumer demand No. 3.
Nearly 43 percent of European CFOs are concerned about credit
market conditions.
RESULTS UNIQUE TO ASIA
CFO optimism remains strong in Asia, with 59 percent of respondents
more optimistic about regional economic growth than they were
last quarter. Hiring plans have slowed somewhat (4.4 percent)
for the next 12 months, and capital spending is expected to increase
a robust 12 percent on average.
Two-thirds of CFOs in Asia say that rising labor costs are eroding
their profit margins, and 57 percent say this is causing them
to look at new ways to retain staff. One-in-ten Asian firms say
that high wage inflation will lead to lower quality of the products
they produce.
RESULTS UNIQUE TO CHINA
Chinese CFOs are optimistic, with 41 percent of respondents
more optimistic about economic growth than they were last quarter.
Employment growth should be strong (10.6 percent) over the next
12 months, and capital spending is expected to increase at a
rapid 14.6 percent clip.
Chinese CFOs are most concerned about the increasing labor costs,
regulatory changes, currency values and consumer demand.
Detailed results, including tabular summaries of the numbers in this release and results from previous surveys, are available at <http://www.cfosurvey.org>.
About the survey: This is the 46th consecutive quarter that
the Duke University/CFO Magazine Business Outlook survey
has been conducted. Among the industries represented in the
survey are retail/wholesale, mining/construction, manufacturing,
transportation/energy, communications/media, technology, service/consulting
and banking/finance/insurance. Revenue-weighted mean growth
rates are provided for earnings, revenues, capital spending,
technology spending and prices of products. Employee-weighted
mean growth rates are used for health-care costs, productivity,
number of employees and outsourced employment. The earnings,
dividends, share repurchases and cash on balance sheet are
for public companies only. Unless explicitly noted, all other
numbers are for all companies, including private companies.
About CFO Publishing: CFO magazine and CFO.com are owned by CFO Publishing, an Economist Group business. With a rate base of 450,000, CFO is the leading business publication for C-level and senior financial executives. It reaches an international audience of corporate leaders with its global group of magazines, including CFO Europe, CFO Asia and CFO China. For more information, visit <cfo.com>.
Duke’s Fuqua School of Business was founded in 1970. Fuqua’s mission is to educate business leaders worldwide and to promote the advancement of business management through research. For more information, visit <www.fuqua.duke.edu>.
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Optimism diffusion measures the percentage of CFOs who have increased optimism minus the percentage who have decreased optimism.
