Good for Sales, Bad for Business

August 1, 2003

 

The depreciation of the U.S. dollar abroad is having a less positive impact on capital spending and hiring than it is on sales, says John Graham, a Fuqua School of Business professor of finance who directs a quarterly, nationwide survey of chief financial officers (CFOs). According to Graham, 20 percent of the surveyed CFOs said the depreciated dollar is increasing sales, but only 3 percent said it would lead to increased capital spending or additional hiring.

Among firms for which foreign sales make up at least one-fourth of their total sales, 51 percent said the depreciated dollar would lead to increased sales; however, even among these firms, only one in ten said the depreciated dollar would increase capital spending or hiring. “While the depreciated dollar will help sales revenue and earnings, these gains will unfortunately have little feedback effect on corporate spending and hiring plans,” says Graham. “Our big concern is deflation, because it would significantly hurt the already modest capital-spending plans.”

The CFO Outlook Survey, conducted by Financial Executives International and Duke’s Fuqua School of Business, electronically interviewed 404 CFOs of U.S. companies the third week of June. CFOs from both public and private companies and from a broad range of industries and geographic areas were represented. If deflation caused overall prices to decline by 2 percent per year, 40 percent of the surveyed companies said they would decrease capital spending, and 46 percent said they would delay all spending.

“ These views are consistent with the effects of deflation during the Great Depression,” Graham notes. “If costs are expected to fall, then companies wait rather than spend now, because the cost of spending is expected to be lower in the future. This can, in turn, have negative effects on the overall economy, wages, and hiring.

“ Alan Greenspan has acknowledged the potential dangers of deflation, and we are confident that the Federal Reserve Bank is taking appropriate actions to keep deflation at bay.”