We recently surveyed CFOs of 567 companies in the U.S. and nearly 900 in Europe and Asia. The economic outlook of these finance chiefs has improved somewhat, but the fledgling recovery in the West is threatened by a bleak employment outlook and credit markets that are still tight, especially for small firms. The outlook in Asia is stonger, with few major threats. Around the world, optimism has improved from recession lows but still remains below its long-run average.
In the U.S., public company earnings are expected to grow by 8 percent over the next year, and even more in Europe and Asia, all up from last quarter. Capital spending plans are also better, with U.S. firms planning a 1.5 percent increase. While this rate of growth is not sufficient for a strong recovery, it represents an improvement from the last several surveys and is the first move into positive territory in more than a year for this critical metric. R&D and advertising should also grow slowly. In contrast, in Europe, R&D and capex are expected to decline in 2010. In Asia, all signs of economic growth are strong and positive.
There are two major threats to the recovery in the Western economies: weak employment and tight credit. In the U.S., on average, companies expect to lay off 1.4 percent of their workforce in 2010. In addition, few firms expect to reinstate labor and benefits programs that were cut during the recession. Fewer than one in three companies say that in 2010 they will restore to pre-recession levels their number of employees, hours worked per week, overtime hours, 401(k) matches, or company contributions to health care or other benefits programs.
Not surprisingly, all of this is taking a toll on employee morale. Thirty-six percent of U.S. companies report that the morale of their employees is fair or poor, significantly worse than the 6 percent who reported poor morale before the recession began. The numbers are nearly the same in Europe and Asia (not counting China), where morale has also worsened significantly. Perhaps the biggest surprise is China, where 55 percent of companies report fair or poor morale today, versus 39 percent who reported low morale before the recession.
Nearly half of Western companies say that the deep cuts in workforce and the reduced training and professional development of retained employees have reduced their firms’ long-term growth prospects.
One piece of potentially good employment news: more than two-thirds of U.S. firms, and 55 percent of European firms, say that they would increase employment if demand for their product were to increase sufficiently. CFOs also say that their number one concern going forward is weak consumer demand.
So we have a chicken and egg problem. Companies are holding off on expanding workforce, and many even reducing it, because of weak demand. But as more people are unemployed or underemployed, weaker product demand will linger and potentially worsen. This negative reinforcement promises to make 2010 a year of sluggish recovery.
Tight credit markets are the other major threat to the nascent recovery. Forty-three percent of U.S. companies say that their banks are less likely to lend to them now than they were in Summer 2008, before the Lehman collapse. The same percentage says that lack of funding has caused their firm to pass up attractive projects, which could hinder their companies’ long-term growth prospects.
Credit constraints are disproportionately affecting small firms. About one-half of firms with sales revenue less than $500 million report that their bankers are reluctant to lend, in contrast to only 30 percent of companies with revenues exceeding $1 billion. Given that small firms are widely credited with more job creation than large firms, the limited credit availability for small companies is another factor hurting the employment picture. Indeed, the CFOs of small companies tell us that, even with tight credit, they expect to increase employment by 1 percent in 2010, while large companies will cut more than 2 percent of workforce. Think of how much more small firms could do if they could obtain adequate funding.
We’ve reported for several consecutive quarters that credit markets remain constrained for small and less profitable firms. Recent events in Washington suggest that this issue has finally made it onto the radar screen of policy-makers.
We believe that improved credit conditions for small companies could be the egg that hatches into stronger employment growth, which in turn increases consumer demand, eventually leading to stronger corporate and consumer spending and a full recovery. Until then, however, we expect lackluster growth as we begin 2010.
John Graham is the D. Richard Mead Jr. Family Professor of Finance at DukeUniversity’s FuquaSchool of Business
Kate O’Sullivan is a Senior Editor at CFO Magazine
Each quarter the DukeUniversity / CFO Magazine Global Business Outlook Survey polls thousands of chief financial officers around the world. The most recent survey reflects the views of more than 1,400 CFOs in the U.S., Europe, and Asia. The survey has been conducted 55 consecutive quarters. The most recent survey contains much information not reported above. See http://www.cfosurvey.org for more details.