The good news: Business leaders’ concerns about the U.S. economy continue to abate. The not-quite-so-good news: Their confidence in their own companies’ futures could use some shoring up.
At the start of a new year, the Duke University/CFO Global Business Outlook survey shows that U.S. CFOs are still trying to come to grips with the economic policies, as well as the economic conditions, that will help shape the future of their businesses. Our survey of top finance executives from around the world has been conducted jointly by the Duke University Fuqua School of Business and CFO Publishing for 72 consecutive quarters. In the first quarter of 2014, we collected views from 379 finance leaders at U.S. companies of all sizes, as well as from 500 executives from other regions of the world.
In this quarter’s results, finance executives’ optimism about the U.S. economy continued to strengthen, slowly but steadily. Their rating of 60 out of 100 for the economy was nearly a three-percentage-point gain over their views at the end of last year.
But the same kind of improvement is not evident in the outlooks for their own companies. While CFOs’ expectations for earnings and revenue growth over the next 12 months remained positive, at 8.5 percent and 5.9 percent, respectively, both figures represent some backsliding from the fourth quarter of last year (12.9 percent and 6.8 percent, respectively, for public and private companies combined). For the moment, few respondents are showing an appetite for committing to more spending, with growth estimates for capital spending, full-time employment and other categories remaining largely unchanged from the previous quarter.
Even as CFOs see signs of strengthening in the economy, they also continue to adopt a “wait and see” stance regarding corporate spending. “As a group, CFOs are a skeptical bunch of people,” commented Darin Holderness, corporate controller at Woodgrain Millwork, a $500-million maker of wood products for residential homes. “Until I see data that my business is going to improve, I’m not going to believe what I read in the papers and go to the bank with it.”
Economic and Political Uncertainty
A large portion of that caution can be attributed to the uncertainty finance executives express over how external factors will affect their businesses. Nearly all U.S. respondents (87 percent) said that uncertainty about economic conditions was acting as a drag on their business planning in some way. The impact was seen equally in hiring plans and capital spending, with 64 percent of finance executives saying economic uncertainty would cause reductions or delays in each of the two categories. Economic uncertainty is not prompting as many companies to build up their cash reserves any further, with only 37 percent of respondents saying they would increase cash holdings.
Aside from the economy itself, actions — and inaction — in the nation’s capital are viewed as impediments to corporate progress. Finance executives confirmed that uncertainty surrounding economic policies and impending regulatory implementation was also dampening their views of their own companies’ prospects. Nearly half of the U.S. respondents indicated that the aftereffects of both policy uncertainty and regulatory uncertainty would be evident in scaled-back hiring plans and in constraints on capital spending.
A number of CFOs surveyed also had doubts regarding the implementation of the Affordable Care Act (ACA). Robert Alessandrini, CFO of the Judge Group—a mid-market staffing and IT consulting firm with 2,800 employees — sees the health-care legislation as a looming uncertainty. Even after talking about ACA for a year and a half, he said, “we’re not sure what it will cost us. It’s brand-new territory for us.” At this point, all he could say for sure was that “it will cost us more money to run our business.”
The Minimum Wage Debate
The debate over raising the minimum wage, which President Obama introduced in his State of the Union address, also surfaced in the first-quarter survey as an area of uncertainty. “If you’re in a business that relies on lower-paid labor, like landscaping, and your cost is going up 33 percent, who is going to bear the brunt of that?” Alessandrini asked rhetorically. He then went on to answer his own question: “The company will pass it on to the consumer … But if it does that, it will affect demand in the future.”
A number of finance executives echoed similar concerns, particularly in industries likely to be hardest hit by a hike in the minimum wage. Among those companies for which the minimum wage was an issue, 39 percent said that raising it would adversely impact hiring, and 37 percent said that their profitability would suffer.
The survey results suggest that, if the minimum wage were set at $10 in all states, it would likely affect retail, service and manufacturing companies the most. Of companies that said they would reduce hiring because of increases in the minimum wage, nearly half of retail firms, and one-quarter of service and manufacturing companies, would balk at the $10 level.
However, the surveyed firms indicated that modest increases in the minimum wage could be more tolerable. Raising the minimum wage from its current $7.25 to $8.50, for example, would cause only about 10 percent of CFOs in the retail, service and manufacturing industries to cut back on hiring.
Alessandrini’s advice? “If you want to raise the minimum wage, it needs to be in stages so it can be well-communicated and businesses can plan for it better.”
The Outlook for Interest Rates
On the plus side, shifts in the government’s monetary policy have not significantly reduced CFO optimism. Although 20 percent of U.S. finance executives said that the Federal Reserve’s announced plans to taper quantitative easing — its program of buying mortgage-backed bonds — has undercut their optimism about their own companies, nearly as many (17 percent) said their optimism has actually increased as a result of the Fed’s intentions.
In any event, most companies feel comfortable that any interest rate increases this year will not be large enough to curtail economic expansion. U.S. CFOs expect that the borrowing costs faced by their firms will increase by about one percentage point by the end of 2014, and more than 85 percent of U.S. companies indicated that this level of increase would not be significant enough to alter their plans for hiring, business spending, or borrowing. In fact, respondents indicated that interest rates would have to rise by 3 percentage points before their plans would be considerably crimped.
Other Views from Around the World
The threat of rising interest rates appears to be raising more concerns outside of U.S. borders than within them. About 40 percent of the executives from the Latin American companies surveyed, and a third of those from the African companies, said that their business optimism was lower because of the Fed’s plans for its quantitative easing program. The erosion of optimism traceable to U.S. monetary policy was even more pronounced at Chinese and Japanese firms.
In contrast, European companies expressed little concern about the Fed’s gradual exit path for quantitative easing. Instead, these firms are more sensitive to their own interest rate hikes. A majority of European CFOs indicated that a rise of two percentage points in interest rates would cut into their plans for hiring, spending and borrowing in 2014. This heightened sensitivity could be a reflection of concerns that are closer to home for European finance executives, given the fragility of the economic recovery taking place on the Continent.