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Corporate Outlook Brightens for 2011

Chief financial officers are becoming more optimistic as we enter 2011. The 481 U.S. CFOs that we recently surveyed rate their optimism about the U.S. economy at 59 on a scale from 0 to 100, up from 49 last quarter. This is the highest reading of the Business Optimism Index since September 2007, and nearly up to the long-run average of 60, indicating that the economy should improve in 2011.

Optimism in the U.S. still trails the Asian business outlook. Asian CFOs (excluding China) rate their optimism 73, up from 71 last quarter. Chinese CFOs rate their optimism 69, which is higher than in the West but a decline from last quarter. European optimism trails, rating only 55 and down from last quarter. Historically, these ratings have accurately forecast real economic activity over the following 12 months.

Finance chiefs are acting on this improved outlook by boosting their budgets for 2011. Over the next 12 months, U.S. businesses plan to increase capital spending by 9%, tech spending by 5%, and R&D spending by 4%. The trend in employment has become positive, with U.S. companies saying that they will increase full-time, domestic employment by 2% in 2011, the largest increase forecast in any quarter since 2006. This employment projection might only reduce the national unemployment rate to 9% by year-end 2011, but the expected trend in employment is welcome news. U.S. companies also continue to outsource work overseas, with offshore outsourced employment expected to rise by nearly 5%.

U.S. public companies expect robust growth in earnings in 2011, with a 20% improvement in the bottom line anticipated. What will they do with this improved cash flow? Half of firms plan to hold onto their cash, given the lingering uncertainty about the economy going forward. However, the other half of U.S. companies plan to begin to deploy their cash in 2011. About two-thirds of these firms will dip into their cash hoard to increase capital spending, and about one-third will use cash for acquisitions.

In another piece of good news, credit conditions improved in 2010 compared to year-end 2009. Thirty-six percent of U.S. companies said that they could borrow more easily in 2010, compared to only 21% who said it was more difficult. Companies with 100 or fewer employees, however, said that borrowing conditions had worsened for them. Given that small, new companies are behind much of the job growth in the economy, tight credit for these firms will continue to dampen potential employment growth going forward.

Even with the improved outlook for 2011, there are a number of concerns and caveats. Consumer demand is still weak in many sectors, limiting upside potential. Intense competition constrains the ability to hike prices. CFOs expect health care costs to rise nearly 9%. Uncertainty about the economy and the intentions of Washington make corporate planning difficult. Employee morale lags. Even with high unemployment, it is difficult for firms in some sectors to hire and retain skilled employees.

Still, on balance, the positives outweigh the negatives, leading to an improved outlook for 2011. Finally!

John Graham is the D. Richard Mead Jr. Family Professor of Finance at Duke University’s Fuqua School of Business

Kate O’Sullivan is Deputy Editor at CFO Magazine

Each quarter the Duke University / CFO Magazine Global Business Outlook Survey polls thousands of chief financial officers around the world. The most recent survey reflects the views of 848 CFOs in the U.S., Europe, and Asia. The survey has been conducted 59 consecutive quarters. The most recent survey contains much information not reported above. See http://www.cfosurvey.org for more details.

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