Energy prices, higher interest rates, and the potential for inflation continue to fuel concern among CFOs about the prospects for the economy. According to the Duke University/CFO Business Outlook Survey, just 32 percent of finance chiefs are growing more optimistic about the direction of the U.S. economy. And while that number is up slightly from a four-year nadir of 29 percent last quarter, the level of confidence remains historically low. At this time last year, 54 percent said they held a positive outlook.
This cautious stance stems partly from worries about inflation. In fact, 82 percent of respondents say that inflation will be higher over the next decade than it was during the Greenspan era. “Inflation worries me,” says James Edge, CFO of Seaboard Bag Corp., a Richmond, Va., industrial-bag maker. “It’s the piranha in the swimming pool.”
John Graham, a professor of finance at Duke’s Fuqua School of Business, says CFOs fear that Alan Greenspan’s successor at the Federal Reserve Bank, Ben Bernanke, might struggle to keep prices stable. “There is a perception that he will be a little softer on inflation,” Graham says.
Specifically, CFOs are still worried about rising health-care and fuel costs. They ranked them first and second, respectively, on a list of concerns, followed by higher interest rates, increased regulation, and wage growth.
But the bleak view of the economy is at odds with CFOs’ expectations for their own companies. Survey respondents expect solid earnings growth of 11.4 percent during the next year, down slightly from 12.7 percent last quarter. The reason for the divergence, says Graham, is that while CFOs are concerned with macro issues like inflation, deficit spending, and a potential housing bubble, they haven’t seen an effect on performance at their own companies. Adds Graham: “They haven’t changed their own forecasts yet, but they see a lot of downside risk.”