For at least the second time this quarter, CFOs have registered a glum outlook the economy and their companies’ business prospects. Financial Executives International and Baruch College’s Zicklin School of Business reported that its CFO Optimism Index for the U.S. economy fell 4.5 percentage points to 63 for the quarter, a three-year low.
Fueling the finance chiefs’ pessimism is the one-two punch of recession and inflation. Released on Tuesday, the FEI-Zicklin survey revealed that 56 percent of the 220 finance chiefs that responded are more concerned about a recession than last quarter and 34 percent are more worried that inflation will rise over the next 12 months. And compared to last quarter, the index that measures CFO optimism about their own companies fell to 72, the lowest level in 39 months. (For the study, respondents were asked to rate their level of optimisim from 0 to 100.)
The FEI/Zicklin results closely track the findings of the quarterly Duke University/CFO Magazine Business Outlook survey, which was released in September. In that study, optimism among finance chiefs reached its lowest point since that study was launched six years ago. Indeed, 62 percent of the 1,316 finance chiefs polled confirmed that they were more pessimistic about the U.S. economy than they were last quarter. Only 13.6 percent of the CFOs were more optimistic.
Pessimism played out in several ways in the the Duke/CFO study. For instance, the CFO respondents expect capital spending to rise by just 3.2 percent and that domestic employment will be flat, though CFOs expect outsourced employment to increase 5.9 percent. Weak consumer demand, high labor costs, and credit-market turmoil ranked among the top worries of CFOs. Meanwhile, the finance chiefs expect the merger and acquisitions boom to fade, stunted by tighter and more expensive credit and weaker economic growth.
The CFOs’ gloom in the FEI/Zicklin survey extended to their own pay packages. On average, the respondents expect a 3 percent decrease in year-end bonuses. Finance chiefs in the retail industry were the most pessimistic about the drop in bonus compensation, predicting a 13 percent slide.
What is on the rise, however, are product prices. CFOs said that their companies plan to hike such prices by an average of 2.3 percent during the next year. CFOs expected only a 1.85 percent price increase last quarter and foresaw a 2.07 percent hike in the first quarters of 2007.
In one of the the key findings of the FEI-Zicklin study, 86 percent of the CFOs place ticked the broker-lender box to indicate the parties most to blame for the current subprime crisis. Credit rating agencies were the next most named offender at 35 percent, while investment dealers, investors, and the Federal Reserve also took some of the heat.
Securities and Exchange Commission Chairman Christopher Cox faired better in the FEI/Zicklin poll than the brokers his agency regulates, as 52 percent of CFOs gave his performance a B grade. Another 41 percent slapped a C grade on the chairman.
The Duke/CFO survey also took the pulse of non-U.S. CFOs and found a split between finance chiefs in Europe and Asia. The outlook of CFOs in Europe was more in line with that of their American counterparts, as 37 percent of European CFOs grew more pessimistic about their own countries’ economies relative to last quarter. Just 26 percent said they were more optimistic than the previous quarter.
Evincing a mood similar to their U.S. counterparts, nearly 43 percent of the European CFOs are concerned about credit market conditions. The cost of labor is the number one corporate worry on the continent. CFOs said the skilled-labor shortage and weak consumer demand are the second and third most worrisome challenges, respectively.
In Asia, however, optimism reigns. Fifty-nine percent of the respondents claim to be more optimistic about regional economic growth than they were last quarter. Further, they expect capital spending to increase a robust 12 percent on average.
Nevertheless, hiring plans for the next 12 months have declined a bit, down 4.4 percent. Two-thirds of the Asian CFOs say that rising labor costs are eroding their profit margins, which has forced 57 percent of them to seek alternative ways to retain staff.