Optimism in the U.S. business environment was stuck in something of a holding pattern at year-end, but at least was heading in the right direction, according to the results of the Duke University/CFO Global Business Outlook for the fourth quarter of 2013. In this quarter’s survey, we polled 400 finance leaders at U.S. companies of all sizes, as well as more than 600 executives from other regions of the world. U.S. finance executives maintained a reasonably positive opinion of the underlying economy, and continued to have confidence in their own businesses. But the survey also showed that this confidence doesn’t always translate into improved prospects for employment — especially in light of uncertainties over the impacts that implementation of the Affordable Care Act (ACA) might have.
CFOs in this quarter’s survey gave their optimism in the U.S. economy a relatively strong rating of 57.2 out of 100. While this represents a decline of a percentage point over the third-quarter view, it remains high enough to suggest that U.S. finance leaders continue to be more bullish than bearish about their country’s prospects. They may think that economic improvement continues at a snail’s pace, but nevertheless, they still see it as improvement.
Revenues and earnings are both expected to grow moderately throughout 2014, and U.S. companies will continue to invest in their businesses. Revenue expectations took another tick upward from the previous quarter — pushing them to 8.3 percent over the next year — while the outlook for growth in capital spending continued to hover around 6 percent annually.
U.S. public companies had an even stronger outlook for earnings growth, building on a jump first witnessed in the third quarter when U.S. expectations for earnings outstripped those of fast-growing Latin American companies for the first time in 2013. In the fourth-quarter survey, U.S. finance chiefs from public companies were looking for earnings growth of 14.3 percent, on average, through next year. Latin American expectations subsided somewhat from their mid-year peak, and finance executives from that region anticipated earnings would grow by 8.5 percent in 2014.
But hopes for better financial performance may not be enough to support a rebound in employment at U.S. companies. Finance executives anticipate that their companies will be making some hires over the next 12 months, but not at a pace that is likely to make much difference in national unemployment figures. Expectations for both full-time and temporary employment growth in 2014 remained subdued at around 1.5 percent. While the economic recovery may not be a completely jobless one, as some had feared, these results suggest many companies are pulling back on the reins.
Caring about Health Care
The results from this quarter’s survey also suggested that the employment scene is not likely to be helped much by the anticipated implementation of the ACA. Survey responses indicated that finance executives are still sorting out what consequences the Act may have on employment strategies, and they are considering a range of possible reactions. While respondents largely were unwilling to say outright that employee numbers would go down as a result of the ACA, the survey provides some evidence that companies will be “much more cautious in hiring due to healthcare costs,” as one respondent writes. Potential responses could include delaying hires, cutting some employee hours to below the 30-hour-a-week threshold that triggers benefits or hiring more new workers at reduced hours.
The smaller companies in the survey — those with less than $100 million in revenue — appeared to be more vulnerable to the fallout. Half of the respondents from these small companies said that, as a result of the ACA, they would consider either switching some employees to fewer than 30 hours per week or hiring new employees that work fewer than 30 hours. Only a third of those from companies larger than $100 million expressed the same sentiment.
A more common effect at companies of all sizes is likely to be the acceleration of recent trends in benefits management in response to healthcare costs that have been skyrocketing for years. In the Business Outlook Survey, 44 percent of respondents said that they would consider reducing health benefits to current employees as a result of ACA, and 38 percent would consider increasing employees’ or retirees’ contributions toward health benefits.
Mark Verbeck, CFO at Coupa Software, a provider of cloud-based spend-management software based in San Mateo, Calif., thinks that, in the high-tech sector, at least, companies mostly wouldn’t expect to see any direct impact from the ACA right away. “For most high-growth tech companies, it’s very competitive for employees,” he says. “The need to continue attracting employees in a competitive environment would make the company unlikely to increase the employees’ burden.”
What worries Verbeck more, he goes on to say, is the excise tax that takes effect in a few years. That’s the so-called “Cadillac Tax” that will be imposed on high-cost health care plans, the ones with the most generous benefits. “Depending on how that Cadillac Tax shakes out,” notes Verbeck, “it might impact how we have to design our plan. I think we probably will want to strive to avoid the tax, so we’ll have to see what we could do to structure the plan so that we are right at the limit.”
The Round-up from Around the Globe
Survey results from other regions of the world were mixed, but primarily positive. Respondents from Asia showed a decided rebound in their outlooks. Rather gloomily last quarter, finance executives from the region expected earnings to take a dip into the negative; now, however, they see decidedly brighter prospects and are targeting growth of 7 percent or more in both earnings and revenue over the next 12 months.
Not surprisingly, European respondents once again were found taking up the rear, expecting earnings to grow by only 2.3 percent (for public companies) and revenues by 2.8 percent (for all companies, including private). However, given that economic recovery in Europe has been lagging that in the U.S. and other regions by six months or more, this sluggish pace could be expected.
Potentially more troubling in Europe is the fact that expectations for capital spending, product pricing, and full-time employment all fell into the negative this quarter. The fall-offs may be reflecting European finance executives’ recognition that belt-tightening will still be needed in the face of painfully slow economic recovery. But despite all this, European finance executives appear to see at least a dim light at the end of the tunnel, with 45 percent reporting that they are more optimistic about their individual economies than they were last quarter, and only 18 percent saying they are less optimistic.