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CFOs Not on the Recovery Bandwagon Yet

Finance executives are a bit more pessimistic than economists and other experts about the forecast for gross domestic product, the unemployment rate, and other economic indicators, according to the CFO Prediction Market.

As financial markets embrace the idea that economic recovery is drawing near, CFOs are not as infused with optimism — indeed, many are downright skeptical that better times are right around the corner. That sentiment was clearly evident in the first two weeks of operation of the CFO Prediction Market.

The forecasting tool, which uses technology from Redwood City, California-based Crowdcast, aggregates the opinions of anonymous finance executives on important economic indicators and trends.

Take the numbers for second-quarter gross domestic product, due to be released this Friday. On average, forecasters project that economic output will be reported to have shrunk 1.5% in the second quarter, less than the first quarter’s 5.5% drop, according to a survey by the Federal Reserve Bank of Philadelphia. But 168 CFO Prediction Market participants think, on average, that the shrinkage is going to be larger — 1.88%. “I don’t see a silver lining yet,” comments one executive. “Business outlook is still grim and everyone is talking of a recovery only post-December.”

Indeed, asked “When will real GDP grow again?” the 168 participants said that there was a 32% probability that growth would restart in the fourth quarter of this year. In contrast, forecasters surveyed by the FRB of Philadelphia say the third quarter will be the turning point. The same group of participants in the CFO Prediction Market say there’s a 27% change that the first quarter of 2010 will be the point at which output rises into positive territory. The group put the chances of a rebound not happen until the second quarter of 2010 at 17%.

“First quarter is the earliest it will grow,” says one. “The drag from continued increases in unemployment and underemployment, as well as the increase in consumer savings will contribute to anemic consumption and lack of growth.”

Indeed, the unemployment rate is a statistic that finance executives track closely, according to betting on the CFO Prediction Market. More than 450,000 virtual dollars have been bet on July’s outcome. (No real money is bet.) The CFO Prediction Market is a speculative market created for the purpose of forecasting. With each bet placed on a forecast, the odds grow that the consensus “prediction” will prove correct. Prediction markets have proven so accurate that they have been used by top corporations, the U.S. military, and the National Association of Business Economists.

On average, 186 participants think the unemployment rate will hit 9.98% this month, but many think the number could creep even higher, hitting double digits. “I think we are going above 10%,” comments one executive. “Revenues have not yet started to rebound and so companies are going to continue to lay people off.” Indeed, unemployment has already topped 10% in 15 states, according to data from the Bureau of Labor Statistics. On Monday Verizon announced another 8,000 job cuts.

One area where additional layoffs will play out is in a higher number of applications for unemployment insurance. CFOs are projecting this week’s tally of initial applications to be as high as 582,000, which would be a 40,000 increase from last week. (Economists, on average, are forecasting 570,000, according to a Bloomberg News survey.)

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