Economy Slowly Improving but Risks Posed by Weak Employment and Tight Credit Remain

Finally, some good news. We recently surveyed CFOs of 620 companies in the U.S. and nearly 800 in Europe and Asia and found some encouraging signs. U.S. finance chiefs are finally loosening the purse strings: capital spending is expected to rise 9 percent, and tech spending, R&D, and advertising should all increase by about 4 percent. These are the largest expected increases in several years and indicate that the business sector has bottomed out and is improving. As further evidence, public U.S. companies expect earnings to increase by 14 percent.

There are caveats of course. The robust growth in business spending and earnings follow two years of cuts, so business investment is making up lost ground more than making progress.  Also, importantly, the recovery will continue to be nearly jobless – employment is expected to barely increase (by 0.2 percent) in the next year. Looking longer term, more than half of U.S. companies say that employment will not reach pre-recession levels again until 2012 or later. Without significant, sustained growth in the workforce, there will be a cap on improvement in the overall economy.

Credit markets remain another major concern, especially for small companies. More than 70 percent of small firms say that credit conditions today are worse than they were in Summer 2008 (pre-Lehman). Even more worrisome, 35 percent of small companies say that borrowing conditions have further deteriorated in the past six months (compared to fewer than 15 percent of large companies). This is particularly troublesome because small firms create jobs. Small companies expect to increase employment on net this year, while large companies plan to reduce workforce. Therefore, lack of small firm credit seems to be one of the constraints on employment.

U.S. companies also tell us that they expect their inventories to decline in the first half of 2010, exerting downward pressure on economic growth. CFOs cite weak consumer demand and their ability to maintain the morale of their employees as some of their top concerns.

While the U.S. business outlook is improving (with some obstacles remaining on the road to a robust recovery), the European outlook is negative. Employment is expected to fall by 1.5 percent, corporate borrowing conditions continue to deteriorate, and business spending will be flat. In stark contrast, Asian CFOs expect strong growth in employment, capital spending, and earnings in the coming year.

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 nearly 1,400 CFOs in the U.S., Europe, and Asia. The survey has been conducted 56 consecutive quarters. The most recent survey contains much information not reported above. See http://www.cfosurvey.org for more details.