Posted by: Joe Weber on June 03
Corporate chief financial officers, typically a dour lot, seem to be perking up a bit about the global economic outlook – but they’re not forecasting a rebound until early next year.
Some 54% American CFOs recently polled in the Duke University/CFO Magazine Global Business Outlook Survey say they are feeling more optimistic about U.S. prospects than they were last quarter. A cheerier bunch, 63% of those questioned in Asia, are similarly feeling upbeat about their corner of the world.
Nonetheless, overall the corporate financial executives have largely written off 2009 for a recovery. Most of the 1,309 surveyed around the world believe that the recession will endure until next spring. The median forecast among U.S. CFOs is for a rebound to begin in about nine months.
“The rest of 2009 will remain challenging, but 2010 looks better for the U.S. and Asia,” said Kate O’Sullivan, senior writer at CFO Magazine. “Given the strong record of the CFO optimism index as a leading indicator, we can expect the U.S. economy to begin to recover by early 2010.”
The CFOs expect earnings at U.S. companies to fall by 4% over the coming 12 months, a reversal from the 3% growth expected a year ago. Capital spending is expected to decline by more than 10% in Europe and the U.S., while it slips just 3% in Asia.
The financial executives expect the poor corporate conditions to lead to little hiring. Employment in the U.S. could decrease by some 5.5% in the next 12 months, they say, driving up the unemployment rate to 11% or even 12%.
“Our survey carries an important message: don’t put too much weight on the ‘soft’ data like consumer confidence. Recovery requires sustained confidence, and such confidence is forged by strong economic fundamentals,” said Campbell Harvey, founding director of the survey and an international business professor at Duke’s Fuqua School of Business. “The economic fundamentals – employment, capital spending, the cost of credit – are still fundamentally troubling.”
Weak consumer demand is a top concern, along with stinginess in the capital markets. Executives at about six of every 10 U.S. companies say they’ve had a hard time finding credit or are paying far more for it. Not surprisingly, 42% of the CFOs at credit-constrained firms say credit market conditions have deteriorated this year, while 23% cite improvements.
“There is a dramatic split between haves and have-nots in the credit market,” said John Graham, a finance professor at the Fuqua School and director of the survey. “Companies that have remained profitable and retained high credit ratings are generally able to obtain new credit.”
The most pessimistic CFOs, as one might expect, are in Europe. Only 30% of 227 quizzed say they are more optimistic than they were last quarter, while 31% are less optimistic. The Europeans overall don’t expect recovery for another 12 months.
Poor credit market conditions are weighing these CFOs down, too. Some 41% of the European CFOs say lending conditions have worsened this year, while only 11% see improvements. And only one in four European firms has successfully renegotiated terms with lenders.
The Asian finance chiefs are far more optimistic -- and with reason. More than half report an increase in new orders this quarter, with the biggest hailing from Southeast Asia, India and China. More than half of Chinese companies report an increase in orders from other Chinese companies. The biggest issue among the Asians is weak consumer demand, followed by credit market and currency risks.
The surveyors, whose work concluded on May 29, quizzed 293 financial executives in China and 249 from elsewhere in Asia. They questioned 540 CFOs in the U.S. The survey was released on June 3.
BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.
See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.