Optimism is growing among the CFO ranks as finance executives see an end to the Great Recession. Fifty-eight percent of finance execs say they are more optimistic about the economy than they were last quarter, and 48% say they are more optimistic about their own companies than they were three months ago, according to the latest Duke University/CFO magazine Global Business Outlook Survey, which queried 657 U.S. finance executives in early September. For the first time in a year, CFOs expect earnings growth over the next 12 months.
J.B. Blackwelder, finance chief at ThorWorks Industries, a maker of specialty coatings and equipment for use in construction, says his business has been flat over the past year, which he considers a victory. “We expect another basically flat year in 2010, but then I’m hoping we can move into fast-growth mode because we are really positioned to move forward,” he says. Some competitors have struggled, says Blackwelder, while ThorWorks has retooled machinery, examined its sourcing processes, and honed its collections procedures.
Shawn Carroll, CFO at Crown Services, a temporary-staffing firm, says his business, typically a leading indicator because companies often hire temporary staff before committing to full-time workers, has picked up by about 15% compared with earlier in the year. “We’re actually getting some orders,” says Carroll. “But it’s slow going.”
Indeed, while CFOs are feeling notably better than they were last December, when just 9% said they felt more optimistic than they had the previous quarter, less than 20% believe the recovery is under way; another 20% think it will begin this year. A full 50% predict recovery in 2010, and the remaining 10% don’t see recovery until 2011 or later. What recovery will look like is also up for debate. “I think we’re going to go into a corrected economy where people are going to have to learn how to make money at lower margins, and companies are going to have to watch their costs significantly,” says Carroll.
Perhaps reflecting this cautious mood is the fact that while finance chiefs plan to loosen some corporate purse strings in the coming year, they are still holding back in other spending categories. CFOs expect spending on advertising, research and development, and technology to be flat over the next 12 months after several quarters of decline. Capital spending is still expected to shrink, although by much a smaller percentage than last quarter. “These numbers are all moving in the right direction, and I think that movement is preparation for the future,” says John Graham, finance professor at Duke’s Fuqua School of Business and the director of the survey. “We’re treading water now instead of sinking. Still, we’d really like to see positive numbers.”
While spending in many areas has stopped declining — small comfort, perhaps, but comfort nonetheless — there are more layoffs to come. Even though more than 60% of survey respondents have smaller workforces today than they did before the recession began, more than 40% plan to eliminate jobs in the year ahead. Of those CFOs who have made layoffs, just 13% expect to return to prerecession staffing levels in 2010. Nearly a quarter say they may never reach those levels again.
Duke’s Graham says a number of factors are contributing to the bleak employment outlook. Many companies have furloughed workers rather than making layoffs; as their business starts to pick up, they will likely bring those workers back full-time as a first step. Rather than hiring new employees, companies may also ask some workers to pick up overtime hours. “Those two things let you potentially increase production without taking the risk of increasing your workforce,” says Graham. “A company might gain a 5% increase in workers’ hours without hiring anybody.”
Companies are continuing to seek low-cost labor overseas. The evidence: finance executives predict a slight increase in the hiring of offshore workers at the same time they expect U.S. hiring to decline by about 3%.
Norman Boling Jr., finance chief at Compact Power, a small manufacturer of landscaping and construction equipment based in South Carolina, has seen his workforce shrink from more than 500 people to 350 as business has fallen off dramatically over the past year. The company’s service business, which maintains small machinery for such companies as Wal-Mart and Best Buy, has remained stable, however, and Boling is exploring new avenues for growth. “I think we will staff back up,” he says. “But we’ll be hiring in different areas.”
The company just signed a deal with Home Depot to run the retail giant’s large equipment-rental business, a move Boling says marks a dramatic shift in his business and an opportunity to hire new staff. “Our resources are going from a focus on wholesale distribution to a focus on rentals,” he says, in an effort to capture consumers and businesses that are more willing to rent than to buy.
Finance executives overseas are also increasingly optimistic about their own country’s economy. In Europe, 52% of finance chiefs are more optimistic than they were last quarter; in Asia that number surges to 75%, while in China 54% are more optimistic. Finance executives in all regions are also markedly more optimistic about their own businesses than they were three months ago.
Still, there are signs that growth in Europe and Asia will also resume slowly. Nearly 60% of European companies have reduced their workforces since the end of 2007, and less than half expect to return to prerecession staffing levels before 2012. In Asia finance executives say capital spending will remain flat over the next 12 months. Chinese CFOs, however, plan to increase capital expenditures by 6% over the same period.