Job creation in May fell far short of expectations, with new hiring increasing at a rate less than one-third of the consensus forecast. The job numbers are notoriously noisy, leaving many to wonder whether the disappointing numbers in May were the result of a confluence of temporary factors or the start of a negative trend.
In early June, we completed the 61st consecutive Duke University/CFO magazine Global Business Outlook survey, a study of chief financial officers at 500 U.S. companies, to get a sense of their economic outlook. The survey is forward-looking (CFO expectations for the next 12 months), so it provides insight into whether May’s job data were a blip or the start of a new downward trend. The outlook among U.S. CFOs has fallen this quarter, but the overall picture suggests that growth should remain positive, albeit at a slower pace.
U.S. finance executives indicate that their optimism about the U.S. economy fell this quarter, now rating their level of optimism at a 57 on a scale from 0 to 100. The long-run average of the Business Optimism Index is 60, so the outlook is somewhat soft, but still remains much higher than the low of 40 reached in the depths of the recession. Overall, these numbers indicate that the economy will continue to grow, but moderately.
The hiring outlook remains weak. U.S. CFOs say that they expect to increase their number of full-time domestic employees by 0.7% over the next year, a pace at which approximately one million new jobs will be created. The labor force itself grows every year, and the economy needs to add about 1,000,000 jobs annually just to keep the unemployment rate at its current level. Therefore, based on CFOs’ forecasts, we expect unemployment to remain near 9% this year. (If the labor force participation rate were to increase, unemployment would rise in the coming months.)
Though these employment numbers are not encouraging, several pieces of information point in a more positive direction. One in five senior finance executives says that they are currently in hiring mode. Another 16 percent say that they would like to hire but are currently unable to because they are resource-constrained, and 9 percent would like to hire but they cannot find job candidates that possess the right skills. Only 12 percent of firms say they are overstaffed for current levels of demand. On net, then, there is pent-up demand to hire that is being held back by resource constraints and skill mismatches. This at least offers upside potential in hiring going forward.
Over the next year, the situation should improve for those currently employed. Many companies plan to reinstate employee benefits and programs that they cut during the recession. These changes should put more money in employees’ pockets and help them feel more financially secure, which in turn should increase personal spending. Sixty-one percent of firms plan to restore hours worked per week to pre-recession levels, 46 percent will reinstate employee training and development, and 43 percent will restore company contributions to 401(k) and other retirement plans.
One longer-term trend that will affect employment relates to the robust business spending we’ve observed for the past year. Has this business spending been on robots and computers that will take the place of the human labor force? Or is the spending related to expansion that will lead to more employment going forward? Nearly 40 percent of firms tell us that their capital spending will add new jobs versus fewer than 10 percent that say the spending is on automation that will reduce employment. This, too, is good news.
Overall, our take is that the May employment numbers were a disappointing hiccup and not a dramatic turn for the worse. The economy does appear to be slowing but should remain in positive territory.
The Duke/CFO study addresses many other issues including planned capital spending (9% growth), earnings (8% growth), dividend increases (10%), cash accumluation (flat), possible contagion in relation to European soverign debt, China’s reduced outlook relative to the rest of Asia, and much more. We encourage you to look online for these results at the web location listed below.
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 806 CFOs in the U.S., Europe, and Asia. The survey has been conducted for 61 consecutive quarters. The most recent survey contains much information not reported above. See http://www.cfosurvey.org for more details.