It didn’t take long for finance executives to lose faith in the future of the economy. After a spike in optimism last quarter, CFOs are back to their worrying ways. According to the latest Duke University/CFO Business Outlook Survey, just 24 percent of CFOs are more optimistic about the direction of the U.S. economy. That figure is well down from last quarter, when 42 percent of finance chiefs had a good feeling about where things were heading.
So why the sudden change? Certainly, Federal Reserve chairman Ben Bernanke’s hand-wringing over inflation hasn’t helped. CFOs are worried that interest-rate increases could choke current economic growth, a concern reflected by the stock-market slide in early June.
It’s not all bad news, though. Almost half of the respondents say they are optimistic about the future of their own companies. And while average forecasts have declined slightly, CFOs are still looking for earnings growth north of 10 percent. Capital-spending expectations have increased in each of the last four quarters. “CFOs are telling us that their companies can ride it out for now, but that we are a couple of steps closer to the danger zone for the U.S. economy,” says John Graham, a finance professor at Duke’s Fuqua School of Business.
That danger zone includes inflation. Among the top concerns listed by CFOs is the possibility of rising salaries and wages. The big problem with such increases is how the Fed will respond. In fact, CFOs say that their own companies can tolerate higher inflation. Core inflation was 2.1 percent in April, but it doesn’t begin to hurt the bottom line until it reaches 3.5 percent. “I’m worried that the Fed may overdo it with interest-rate hikes,” says Michael Wainscott, CFO of Technology Crops International.
Overseas, finance executives are also reining in expectations. Optimism declined 6 percent in Europe and 13 percent in Asia, but remains generally higher than it is in the United States.