CFO Concerns

November 30, 2006
CFO Concerns

With chief financial officers' optimism about the U.S. economy at a five-year low, many are planning for reductions in capital spending and hiring. Their sour outlook stems from concerns about consumer demand, the rising cost of labor, and high fuel costs.

These are some of the conclusions of the September 2006 Duke University/CFO Magazine Business Outlook Survey, which asked CFOs from a broad range of global public and private companies about their expectations for the economy. The survey ended September 10 and generated responses from 959 CFOs, including 571 from the U.S., 208 from Asia, and 180 from Europe. The survey of European CFOs was conducted jointly with RSM Erasmus University in the Netherlands.

The study found that among U.S. CFOs, the level of pessimism about the nation's economy is the highest in more than five years. Nearly half of CFOs are more pessimistic about the economy than they were last quarter; only 19.8 percent are more optimistic.

Capital spending plans have been cut—with planned increases of only 5.1 percent over the next twelve months, down from a planned increase of 7.5 percent last quarter—and CFOs expect earnings to increase 9.4 percent over the next twelve months, down from last quarter's 10.4 percent predicted increase.

Weak consumer demand, rising labor costs (due in part to a scarcity of skilled labor), and high fuel costs top CFOs' lists of concerns. This is the first time in the survey's history that weak consumer demand has ranked as the number-one concern. CFOs say that additional capital spending and hiring cuts will follow if consumer demand continues to weaken. Campbell R. Harvey, J. Paul Sticht Professor of international business at the Fuqua School of Business and founding director of the survey, also points to CFOs' lack of confidence in Federal Reserve policy.

"CFOs are feeling so negatively about the U.S. economy that one-third predict we will be in recession within one year," says John Graham Ph.D. '94, D. Richard Mead Jr. Family Professor of finance and also a director of the survey. Graham says the growing pessimism "does not bode well for the economy. In fact, our analysis shows that CFO business optimism has a predictive correlation of about 70 percent with future capital spending, earnings, and employment. Therefore, we expect these areas to worsen in the coming year."