CFOs are shaking off the winter doldrums, feeling much better than they were in December when worries about the fiscal cliff overshadowed the last Duke University/CFO magazine Global Business Outlook Survey and put a damper on expectations. Now it seems CFOs are looking forward to the year ahead, rating their level of optimism at 55 out of 100, up from 51 last quarter. While the number is still below the survey’s historical average of 59, improvements in spending and hiring expectations also point to a stronger outlook.
On average, the more than 500 U.S. finance chiefs surveyed expect to increase their capital spending by more than 5% in the next 12 months, more than double last quarter’s forecast. CFOs also say their company will increase spending in technology by nearly 8%, in a dramatic jump from late 2012. They will boost marketing and advertising outlays by more than 4% and raise research and development spending by 1%.
More jobs may also be on the way. Finance executives say they plan to add staff in the coming year, forecasting just over a 2% increase in their full-time domestic workforce in the next 12 months on average. Should that number hold true, it will have a significant impact on the unemployment rate. Wages, meanwhile, will rise by just over 3%, in an increase from the past several quarters.
Many CFOs are seeing their business return to health after several challenging years. Kevin Manion, finance chief at Young’s Market Co., a family-owned liquor and wine distributor with approximately $3 billion in revenue, says his business is “feeling pretty comfortable.” During the recession, the company saw margins decline as customers traded down to lower-priced spirits and wines, even though volume held steady. Today, the company is investing in growth, expanding its real estate portfolio, and increasing its staff by 5% during the past two years as customer demand has strengthened.
Ups and Downs
Despite the improved results overall, CFOs are not without their worries. At Vantage Custom Classics, a maker of promotional apparel, the outlook is more subdued than at Young’s Market. Finance chief Eric Wukitsch says the company “has been in a holding pattern for the past six years,” as its business is dependent on large corporate clients that are “not spending any extra money doing anything right now.” Wukitsch says he’s hopeful about the second half of the year, when he anticipates customers will dip into their cash holdings and spend more on marketing and advertising. At that point, he will plan to add staff should orders pick up.
Along with concerns about demand, CFOs also cite federal government policies and price pressure as top macroeconomic worries, while the cost of health care and attracting and retaining employees also rate as critical concerns.
Rising commodity prices is another worry, putting pressure on margins as finance executives hesitate to raise prices amid a shaky recovery. Marc Friedant, CFO at Clement Pappas, a bottler of private-label juices and cranberry sauce, says commodity costs is one of his biggest concerns, citing apple concentrate, plastic, and corrugated cartons as major inputs. Only certain commodities can be hedged, and apple concentrate, the company’s key ingredient, isn’t one of them.
For Manion, the cost of fuel poses a challenge, as the company employs a fleet of 500 drivers. But with the volatility in fuel prices, he says he is reluctant to hedge.
Calls for Reform
Perhaps reflecting their long-running concern about attracting qualified employees, CFOs issued a resounding call for immigration reform in this quarter’s survey, with 88% saying the United States should drop its current lottery system for immigration in favor of a merit-based system. More than 80% favor routine granting of H-1B visas for foreign undergraduate students graduating from U.S. universities with degrees in the STEM (science, technology, engineering, and math) fields, and 78% favor routine granting of green cards for foreign graduate students receiving degrees in those fields in the United States.
For Wukitsch, immigration reform is less an ideological matter than a practical one. “More people with a way to get citizenship would expand our potential labor pool,” he says. “If we had meaningful immigration reform, the expanded labor pool would be very advantageous for our business.”