Duke - The Fuqua School of Business

News Release

CFOs Expect 3Q Profits to Jump 14% but Keep Reigns on Capital Spending

Predict 3% GDP Growth

June 12, 2002

DURHAM, N.C. and MORRISTOWN, N.J., June 13, 2002 - Chief Financial Officers expect their companies' earnings to grow significantly in the third quarter, but say capital spending will remain tight. According to the quarterly "CFO Outlook Survey" conducted this month by Financial Executives International (FEI) and Duke University's Fuqua School of Business, 74% of the 358 surveyed companies say their third quarter earnings will be higher than the second quarter's, with the increase averaging 14.4%. When private companies are removed from the statistics and only publicly owned companies are included, the average earnings growth is 11.9%.

Despite optimistic earnings expectations, only one in five companies expects capital spending to reach "normal" rates, and 58% say they are spending "cautiously." Fifteen percent of CFOs say that their companies are holding off on capital spending at this time, and only 7% are spending "ambitiously." This translates into an expected increase in capital spending of only 0.3% in the coming quarter. Technology spending will also be moderate, with an increase of 1.9% expected.

Corporations will continue to cut costs by keeping inventories lean: 29% of CFOs say that their firms will reduce inventories, with an average reduction across all firms of 1% during the next quarter. Productivity growth should be robust, however, with CFOs expecting output per employee to increase by 2.3% in the coming quarter.

"This economic recovery is one for the books. A robust GDP in the first quarter [annualized at 5.6%] was followed by an April drop in leading economic indicators and a lackluster stock market, " said Dr. John Graham, Professor of Finance at Fuqua and director of the survey. "These conflicting forces should resolve to a clearer upward direction before year-end, with growth enhanced by improving worker productivity and higher profits. We're envisioning a 'gradual takeoff' for the economic recovery, to parallel the 'soft landing' of the slow down of 2001."

An Economic Snapshot

Regarding the US economy, CFOs expect gross domestic product (GDP) to grow 2.9% over the upcoming 12 months, compared to the expected 2.3% GDP growth expressed in last quarter's survey. The GDP prediction suggests optimism about the economy, and nearly half (47%) of the surveyed CFOs say they are more optimistic than last quarter about the economy. One in five (21%) is less optimistic, and one-third (32%) have not changed their point of view.

Asked about their companies' current state of recovery from the recession, 20% of CFOs say their companies are moderately recovered (compared to 12% last quarter), and 27% are nearly fully recovered or never slowed down. Fifty-three percent say their companies have not begun to recover from the recession or their recovery is just beginning, an improvement over 64% giving this response last quarter.

More than half (54%) say they are more optimistic about their companies' financial prospects that they were last quarter, while a much smaller 17% are less optimistic. Twenty-nine percent have not changed their point of view.

Inflation, Advertising and Employment

Financial executives expect to increase the prices of their products by 0.9% in the coming quarter, which is a sharp increase compared to last quarter, in which prices were expected to increase by only about 0.5% on a quarterly basis. Spending on advertising and marketing should grow by 1.1% in the third quarter, relative to this quarter's spending.

Employment will be flat during the third quarter. Thirty-nine percent of firms expect to increase their number of employees, while 21% expect a reduction, and 40% will make no change. Overall, this translates into expected employment growth of only 0.4%. Interestingly, even though few firms plan to increase payrolls and national unemployment is hovering around 6%, 45% of companies report that it is somewhat difficult to find qualified employees, and another 7% say it is very difficult.

CFOs say that their firms are also expecting to cut overtime during the coming quarter, by an average of 0.4%. Finally, wages are expected to rise by 1.6%.

US Dollar

In general, earnings should be fairly immune to the recent devaluation in the U.S. dollar. Two-thirds of CFOs say that their earnings will not be affected by the devalued dollar and another 21% say the devaluation will actually help their earnings. The remaining 12% say that earnings growth will be hurt by the devalued dollar. Nearly half of firms with foreign sales making up at least one-fourth of their total sales will experience increased earnings due to the devalued dollar.

Tech Industry Still Feeling Pain

Technology stood out as the industry feeling the most effect of the US recession. Tech CFOs are the least optimistic about the US economy, with 40% of technology respondents saying they were less optimistic than last quarter. The industry also led in least optimism about their own companies' financial prospects, with 30% less optimistic than last quarter. Further, 37% said that they were not at all recovered from the recession, highest among all industries. CFOs of tech companies also said they expect to raise the price of their products 2.6% next quarter, the highest of any industry, and anticipate decreasing their employee count by .6%.

About the Survey

The CFO Outlook Survey, conducted by Financial Executives International and Duke University's Fuqua School of Business, surveyed CFOs of U.S. companies during the second week of June via an Internet-based poll. Almost 360 CFOs from both public and private companies responded from a broad range of industries, geographic areas and revenues. Among the industries represented are retail/wholesale, mining/construction,
manufacturing, transportation/energy, communications/media, technology,banking/finance/insurance, and services/consulting. Revenue-weighted means were provided for earnings, capital spending, technology spending, advertising spending, inventory and prices of products. Employee-weighted means were used for productivity (output per hours worked), wages, number of employees and overtime.

FEI and Fuqua have conducted surveys gauging the country's economic outlook from the perspective of corporate CFOs for the past six years. Detailed results of this survey, including industry breakdowns, as well as other "CFO Outlook" surveys are available at http://www.duke.edu/~jgraham/fei.html or http://www.duke.edu/~jgraham

Financial Executives International (FEI) is the leading advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers, and controllers. FEI enhances member professional development through peer networking, career planning services, conferences, publications, and special reports and research. Members participate in the activities of 86 chapters, 75 of which are in the United States and 11 in Canada. For more information about FEI, visit www.fei.org.

The Fuqua School of Business at Duke University was founded in 1970. Fuqua's mission is to educate thoughtful business leaders worldwide and to promote the advancement of business management through research. For more information, visit www.fuqua.duke.edu.