Finance chiefs took a decidedly gloomy turn in September, as optimism levels and spending plans declined and hiring plans remained flat. Still, the numbers remain in positive territory and do not indicate that CFOs are retrenching due to fears of a double-dip recession. In the context of weak macroecomic numbers and concerns about Europe, finance executives’ outlook is better than expected– and suggests that the economy may continue on a slow growth trajectory.
On September 9, we completed the 62nd consecutive Duke University/CFO magazine Global Business Outlook survey, a study of chief financial officers at 494 U.S. companies and 503 more in Europe and Asia, 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 recent macroecomic data are the start of a new downward trend or more of a temporary blip. While the outlook among U.S. CFOs has certainly dimmed this quarter, growth should remain positive, albeit at a sluggish pace.
First, the bad news. U.S. finance executives indicate that their optimism about the U.S. economy fell this quarter, now rating their level of optimism at a 49 on a scale from 0 to 100. The long-run average of the Business Optimism Index is 60, so the current rating is weak, but still remains above the low of 40 reached in the depths of the recession.
Business spending also looks weak. Thus far in the recovery, capital expenditures by businesses have been a strong point. Such spending will continue, but at a markedly reduced level. U.S. firms expect to increase capital spending by 4.5% over the next 12 months, down from 9% last quarter and 12% two quarters ago. While this decrease is worrisome, the number remains positive and contrasts with the substantial capital spending cuts we saw during the recession.
The hiring outlook remains grim. U.S. CFOs say that they expect to increase their full-time domestic workforces by 0.9% over the next year, a pace that translates to approximately 100,000 new jobs per month. As the labor force itself grows, the economy needs to add roughly 100,000 jobs monthly just to keep the unemployment rate at its current level. Therefore, based on CFOs’ forecasts, we expect unemployment to remain near 9% for the next year.
Though these numbers are disheartening, they are not the sharply curtailed spending plans that would precede a double-dip recession. Indeed, when we asked CFOs how concerned they were about a recession occurring, nearly two-thirds were only moderately concerned, a little concerned, or not at all concerned about an imminent recession. (Eleven percent say we are already in recession, and another 25% are very concerned that we soon might be). Likewise, two-thirds of companies have continued with the hiring and capital spending plans they made three and six months ago (versus only one-third that have pulled back on such plans). On an even more positive note, public firms expect to increase dividends by more than 10% in the coming year.
Taken together, these numbers imply that the U.S. economy should continue to grow, slowly. Our view is that this makes the glass half full (and hopefully rising) and not half empty (and falling).
In Europe, the situation is shakier. Optimism fell more than in the U.S., as did spending and hiring plans. In fact, European firms plan to reduce domestic payrolls over the next year by 0.3%. Earnings will also fall slightly. The Asian outlook also declined, but remains strong overall. Asian CFOs continue to plan double-digit increases in capital spending and say they will boost payrolls by approximately 7%.
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 996 CFOs in the U.S., Europe, and Asia. The survey has been conducted for 62 consecutive quarters. The most recent survey contains much information not reported above. See http://www.cfosurvey.org for more details.