Global CFO Survey: Economic Optimism Drops as Risks Multiply for Corporate Sector
dukenews.duke.edu
The study's main findings are:
-- Only 24 percent of CFOs are more optimistic about the U.S. economy, in contrast with 42 percent last quarter;
-- 49 percent are more optimistic about their own companies, however, suggesting the pressures facing the economy have yet to affect most firms directly;
-- Rising wages, falling consumer demand, and increased fuel costs top CFOs’ lists of concerns;
-- CFOs say their bottom lines will suffer if core inflation rises to 3.5 percent, the Federal Funds rate goes above 5.5 percent, or if the price of oil surpasses $75 a barrel;
-- Companies will increase capital spending 7.5 percent over the next 12 months, an increase from last quarter, when CFOs predicted a rise of 6.5 percent;
-- Earnings are expected to increase 10.4 percent over the coming 12 months;
-- Corporate cash balances will grow another 2.1 percent.
OPTIMISM ABOUT U.S. ECONOMY PLUMMETS
Business optimism about the U.S. economy declined sharply, with only 24 percent of U.S. CFOs more optimistic than they were last quarter; 46 percent are less optimistic. At the same time, CFOs’ optimism about their own firms remained fairly steady, with 49 percent growing more optimistic and 28 percent becoming more pessimistic.
“CFOs are telling us that we are moving closer to the danger zone for the U.S. economy, but that their firms can ride it out for now,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. “There are several risk factors that are near the tipping point, and if any of them worsens, it would heighten the risk of a corporate slowdown.”
CFOS WORRIED ABOUT WAGES, INFLATION, CONSUMER DEMAND
Corporations are worried about inflation and wages. U.S. companies expect to increase their prices by 3.1 percent over the next 12 months. This would put the U.S. economy dangerously close to 3.5 percent inflation, the level at which a majority of CFOs say their bottom lines would begin to suffer. Trouble may arrive even sooner as a result of oil prices; CFOs say prices above $75 per barrel will harm profits.
CFOs are similarly worried about the Federal Funds rate. “CFOs don’t want any more Fed hikes,” said Campbell R. Harvey, founding director of the survey and a finance professor at Duke. “The CFOs have drawn a line in the sand. Rates above 5.5 percent will be damaging and rates above 6 percent would cause substantial damage to their bottom lines. The Fed does not have much wiggle room left.”
CFOs cited rising labor costs as their No. 1 concern for the first time in the history of the survey. The second highest-rated risk facing the corporate sector is waning consumer demand, followed closely by rising fuel costs, increasing interest rates, a shortage of skilled labor and high health care costs. Asian corporate concerns are similar, but with more emphasis on consumer demand and fuel. European CFOs list high wages and salaries at the top of their concerns, followed by waning consumer demand.
“The risk posed by rising health care costs has not gone away, but companies now have bigger worries,” said Don Durfee, research editor at CFO magazine. “Rising wages and salaries are a problem because CFOs tell us that they can only pass along about 40 percent of increases in employment costs. Similarly, on average only about half of rising commodity prices show up in the final prices of the products that their companies sell. The companies have to eat the rest.”
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