These days, "optimism" is a relative term. "I'm not optimistic, but I think things may be improving, if only because we've bottomed out," says Jeff Burchill, CFO of FM Global, a commercial-property insurer.
The fact that 53 percent of finance executives responding to this quarter's Duke University/CFO magazine Global Business Outlook Survey are less optimistic than they were three months ago can be seen as good news only when compared with the whopping 72 percent who said last quarter that they were less optimistic than they were at the start of the year. But even though CFOs are not quite as down as they were in April, they're hardly thrilled with the economic picture. In fact, many are taking significant steps to control costs as they prepare for a lengthy downturn.
Seventy-one percent of finance executives say the U.S. economy will not begin to recover until 2009 or later, and 30 percent say they don't expect a rebound until at least the second half of next year. CFOs are forecasting minimal growth in earnings and capital spending over the next 12 months. About 40 percent of them plan to delay or cancel expansion plans, and roughly the same number have initiated cost-cutting programs.
Like many finance executives, Burchill has factored the bad economic news into his company's planning. He believes high energy prices, a weak dollar, and inflation will continue. "We're building the cost structure into our products," he says. Even so, "we're under the assumption that we're going to have stress around our profit margins."
In a marked change from past years, when finance executives shrugged off the rising cost of fuel, 60 percent of survey respondents now say they are taking steps to address higher fuel prices, including reducing business travel, improving the energy efficiency of their facilities, and adopting more-efficient shipping processes.
Burchill says he worries about the impact of high fuel costs on FM Global employees, who have little choice but to drive to work, given the company's suburban Rhode Island location. The company is launching a Website through which employees can arrange carpools, and will now provide shuttle service from downtown Providence so that workers can use public transportation.
Some CFOs are passing along the increasing cost of fuel and other commodities to customers (see "To Raise or Not to Raise?"), saying they expect to raise prices an average of 4 percent over the next year. Wages will grow by just 3 percent, while domestic hiring will flatten. CFOs also plan layoffs, which will do little to allay concerns about declining consumer demand for goods and services.
Slightly more than a third of finance chiefs say their companies have been directly affected by the credit crunch, a number that has remained steady for the past quarter. Among lower-rated firms, however, that number soars to 82 percent. Those with credit ratings of B or lower have seen their cost of credit jump more than 300 basis points since last summer. Overall, among those affected by the credit-market turmoil, 58 percent have had difficulty accessing credit and just under half have experienced an increase in the cost of credit.
Don Elsey, CFO at Emergent BioSolutions, a Maryland-based manufacturer of vaccines, says access to credit may slow the company's growth plans this year. "We anticipate increasing our capital spending, and our hiring will be up by 10 to 15 percent this year, but the banks are all extremely gun-shy," he says. Despite the fact that the company has always maintained a solid credit history and has revenues and profits to present to bankers, Elsey says banks are now seeking equity as part of their financing packages. "We're very reluctant to go down that path," he adds.
All in all, CFOs are treading a path that has an unmistakable downward slope. The question that remains is whether the steps they are taking to reverse direction will have the desired effect or result in a continued slide.
Kate O'Sullivan is a senior writer at CFO.
To find out how CFOs regard soaring costs, the credit crisis, and their future prospects, click here.