Survey: U.S. CFOs Express Declines in U.S. Economic Optimism

Dec 04, 2012 No Comments by

MORRISTOWN, N.J. and NEW YORK, Dec. 4, 2012 /PRNewswire/ — Amid looming threats to the Eurozone, sequestration cuts and a fiscal cliff, Chief Financial Officers, especially in the U.S., continue to remain uncertain about the future of the economy and their business, as well as the expectation of a recovery, finds the latest “CFO Outlook Survey.” According to the survey conducted by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business, CFOs are doing more with less, by retaining their current talent, and potentially delaying hiring.

Respondents to the quarterly survey, which polls CFOs of public and private businesses on their economic and business confidence, revealed that U.S. CFOs have grown increasingly doubtful that the U.S. will experience a recovery in the next year.  When asked about the timeframe that a U.S. economic recovery would take place, 53 percent believed a recovery would be delayed until at least 2014, an increase from the previous quarter, when only 38 percent predicted a recovery would remain that far out.  The number of CFOs who believed the U.S. is already in the midst of a recovery stayed steady (26% versus 22% in Q2), but only 13 percent now trust the U.S. would recover at any point in 2013.

More than three-quarters of U.S. CFOs (76%) stated that their expectations of U.S. economic growth will be impacted by tax increases and potential sequestration. A similar percentage of CFOs (74%) are bracing for impact of the scheduled expiration of Bush-era tax cuts at the close of 2012. Sixty-seven percent of CFOs feel that the current Congress should postpone reductions mandated under sequestration and extend the Bush tax cuts for another six to twelve months, to give the next Congress and the Administration enough time to work out a permanent solution to the fiscal crisis. This is compared to nearly a fifth of U.S. CFOs (21%) who believe Congress should allow sequestration to occur and the tax cuts to expire.

“Post-election, CFOs in the U.S. are expressing alarming concerns over the threat of a fiscal cliff and sequestration, which has a resounding impact on their prospects for economic growth,” said Marie Hollein, President and CEO of Financial Executives International. “Respondents to the survey seem to support the postponing of sequestration cuts and extending Bush tax cuts to avoid pushing the U.S. into a potential recession.  With the timeline for a decision by the current Congress drawing closer, CFOs are growing more uncertain that the U.S. economy will recover in the near term.”

CFOs in the U.S. are also preparing for the full implementation of the Patient Protection and Affordable Care Act (PPACA) by 2014, and planning for potential effects on hiring and benefits in the next two years.  While about 44 percent expect no significant impact on hiring and benefits in 2013, CFOs will be forced to make changes in 2014, most commonly through an increase in employee contributions (42%), and decrease in the quality of employee benefits (41%).

Global Economic Optimism Remains Stable; U.S. CFOs Lower Confidence in U.S. Economy and Business Prospects
This quarter, the level of optimism toward the global economy among U.S. CFOs, as well as a select number of CFOs from Europe (Italy and France) has remained steady over the previous quarter.

The third quarter CFO Optimism Index for the global economy was 44.20 for U.S. CFOs (compared with 44.10 in Q2), and rose slightly to 45.20 among European CFOs (up two points from Q2). However, U.S. CFO’s optimism toward the U.S. economy dipped another four points to 51.60 in the current quarter (from 55.40 in Q2), while European CFOs on average surpassed the U.S. in their confidence of the U.S. economy (from 52.90 in Q2 to 55.90). U.S. CFOs optimism towards the financial prospects for their company also sunk five points from the previous quarter (67.80) to its lowest mark in more than two years (62.70).  Optimism of CFOs in Europe toward their companies reached 55.70, a minor increase from Q2 (54.50).

CFOs across both regions lowered many of their projections for the next 12 months. Whereas CFOs in the U.S. stated in August that they expected a 15 percent increase in net earnings, this quarter it has been reduced to a nine percent increase.  CFOs in the EU are anticipating a two percent increase in earnings and nearly a five percent increase in revenues.  Sixty-two percent of U.S. respondents and 66 percent of European respondents said their company’s interest in acquisitions was unchanged relative to the previous quarter.  While the number of CFOs who felt M&A interest had increased was significantly smaller (29% in the U.S. and 24% in Europe), the amount of CFOs who experienced a decrease in activity was ten percent among EU CFOs and nine percent among U.S. CFOs.  In both regions, the large majority of CFOs saw no change in their company’s interest as an acquisition target.

“CFOs appear to be hunkering down in preparation for continued economic stagnation in the U.S. and Europe, as evidenced by low levels of optimism about the economy,” said Linda Allen, Professor of Economics and Finance for the Zicklin School of Business at Baruch College.  “The survey suggests that the CFOs expect a delay in the U.S. economic recovery to 2014 due to three major areas of concern: first, uncertainty about European stability and the fiscal cliff in the U.S., second, high employment costs, with 93% of U.S. CFOs expecting increased employee healthcare costs, and third, weakening revenue and earning expectations, resulting in reduced growth and acquisition opportunities.”

CFOs Maintain Headcount, Take Steps to Retain Talent

When asked about their plans for hiring, 58 percent of U.S. CFOs stated that they plan to hire additional staff in the next six months, while about a third (35%) have no plans to hire.  On the contrary, European CFOs are split on their plans, with 47 percent planning to hire, and a similar amount (45%) intending to halt hiring for the next six months. Of those that are hiring, CFOs are primarily seeking mid-career professionals (54% in the U.S.; 42% in the EU) and experienced and skilled technical workers (44% in the U.S.; 46% in the EU). This only varies slightly in Europe. While U.S. CFOs stated that they are also looking for entry level college graduates (49%), EU CFOs were seeking more entry level high school graduates (42%).

Although CFOs are cautious in their prospects for hiring, they revealed some success in retaining the workforce they currently have. The majority of CFOs in the U.S. and Europe have not been forced to reduce headcount over the past 12 months (69% in the U.S. and 56% in Europe).  For the third of CFOs who had to make headcount reductions, on average they lowered their staff by 13 percent in the U.S. and 10 percent in Europe.  A decline in sales was the main reason attributed to this reduction. As CFOs take specific actions in the current environment to retain their current talent, CFOs in the U.S. are paying significant attention to training and development (46%), compensation, and ensuring opportunities for career advancements (38% each).  Training and development is also a top area of focus for European CFOs (42%), followed by office atmosphere (33%) and team building (29%).

U.S., Europe CFO Share Eurozone Concern;  Diverge on Fiscal Cliff, Election and Other Projections

The CFO Outlook Survey polled CFOs across both regions on a range of topics from the Eurozone, China, and the Fiscal Cliff, as well as key forecasts on economic indicators.  Highlights from the findings include:

- Future of the Eurozone: This quarter, CFOs remain very concerned over the fate of the Eurozone.  When asked to rate their concern on a scale of one (not concerned) to five (very concerned), U.S. CFOs (93%) selected a “three or higher,” and 81 percent of CFOs in Europe expressed identical concern. This remains consistent with their level of concern at the start of the year. CFOs were tentative to predict an outcome of the latest efforts by the ECB and the EU member states to solve the Euro crisis (53% of CFOs in the U.S. and 37% of CFOs in Europe believed it was “too early to tell”). Among the CFOs who did foresee an outcome, more U.S. respondents felt the actions would be insufficient to prevent further instability and ultimately lead to one or more countries leaving the Eurozone (41% of total respondents), while 35 percent of European CFOs felt that the outcome would be successful in stabilizing the debt crisis and ultimately help further integrate the Eurozone.

- Business with China: The majority of CFOs shared their belief that China is a sound competitor (65% of U.S. CFOs and 61% of European CFOs), but their current activity with the country varied by region. In the quarterly survey, U.S. CFOs stated that generally their companies are not currently doing business with China (64%) while close to a third (33%) either sell or produce in China.  In contrast, 43% of European CFOs stated that they currently do business with China, split evenly between those that sell to China and those that produce in China.

- Spain Bailout: Should Spain be forced to request a bailout, 52 percent of U.S. CFOs and 39 percent of EU CFOs believe that the worsening Spanish economy would be the primary driver. A similar percentage of EU CFOs (35%) feel the market’s lack of confidence in the Euro was the primary driver (compared with only 18% of U.S. CFOs). However, a larger percentage of U.S. CFOs feel the main driver would be Spanish government polices (30% of CFOs in the U.S.; compared with 27% of CFOs in the EU).

- U.S. Fiscal Cliff: CFOs on both sides of the globe weighed in on their thoughts on the fate of the U.S. fiscal cliff.  Given the election outcome, 51 percent of U.S. CFOs believed that the results lower the chances that the U.S. Congress will find a solution to the fiscal cliff before the New Year, compared with only 19 percent that felt it improved the likelihood of a settlement being reached.  The majority of U.S. CFOs also believed that the way in which the problem plays out would have a significant impact on their economy. European CFOs monitoring developments from afar had a fairly more optimistic view of a positive outcome, with less than a fifth (16%) perceiving that President Obama’s re-election lowered the opportunity for a solution.

- U.S. Employment: CFOs in the U.S. expect little change in the unemployment rate in the next year, and on average, expect that it will remain above eight percent. CFOs in Europe on average expect their local unemployment to grow from nine percent to almost 12 percent in the next 6-12 months. When asked about the impact of the recent U.S. election would have on their forecast, 58 percent of U.S. CFOs believe it will have a negative impact (compared with 12% who believed the impact would be positive). The overwhelming majority of U.S. CFOs felt that the election would have a negative impact on U.S. employment (71%) compared with nearly a fifth (19%) who felt there would be no impact and 11 percent who felt the impact would be positive. On a smaller scale, only a fraction of European CFOs expected a negative impact on the global economy (4%; 43% believed there would be no impact) or their country’s employment (6%; 82% believed there would be no impact).

- Strength of the U.S. Dollar: U.S. respondents believe that the U.S. dollar exchange will strengthen against the Euro and the Pound in the next 6 to 12 months, while weakening against the Yen during the same time period.  In Europe, CFOs on average expect the exchange rate to remain relatively unchanged.

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