In mid-September, Federal Reserve Board chairman Ben Bernanke told an audience at the Brookings Institution that "the recession is very likely over at this point." He may well be right, judging from the growing optimism of respondents to the latest Duke University/CFO Magazine Global Business Outlook Survey, which polled 657 U.S. finance executives in early September. But if the economy has indeed taken a turn for the better, the same can't be said for employment, based on the plans described by respondents.
More than half of the CFOs polled — 58% — say they are more optimistic about the economy than they were last quarter, while 48% are more optimistic about their own companies than they were three months ago. And for the first time in a year, CFOs expect earnings growth over the next 12 months.
That's not to say that most finance executives think a recovery is actually under way. While they are feeling much better than they did last December, when just 9% were more optimistic than they had been in the previous quarter, just 26% of them believe the recession is over. Another 13% think economic recovery will begin this year, while fully 60% say it will wait until 2010 or later.
Shawn Carroll, CFO of temporary-staffing firm Crown Services, says an uptick in his industry is usually a leading indicator of economic recovery. And Crown's business is improving: sales have increased by about 15% compared with earlier in the year. "We're actually getting some orders," says Carroll.
What the recovery will look like is open to 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.
Such caution is widespread among finance chiefs, as they plan to loosen only a few corporate purse strings in the coming year. CFOs expect spending on advertising, R&D, and technology to be flat over the next 12 months, while capital spending is expected to continue to shrink, although at a slower pace. Yet John Graham, finance professor at Duke's Fuqua School of Business and director of the survey, says these numbers "are all moving in the right direction. We're treading water now instead of sinking."
More Layoffs Ahead
One area where the numbers continue to sink is employment. More than 60% of survey respondents have made layoffs since the recession began, and more than 40% plan to eliminate jobs in the year ahead. Of those CFOs who have made layoffs, just 13% expect staffing to return to prerecession levels in 2010. Nearly a quarter say they may never reach those levels again.
Graham says a number of factors are contributing to the bleak employment outlook. For one, many companies have furloughed workers rather than making layoffs; as business starts to pick up, they will likely bring those workers back full-time as a first step. Companies may also ask some employees to work overtime, rather than make new hires. "Those two things let you potentially increase production without taking the risk of increasing your workforce," says Graham.
Finance executives also predict a slight increase in the hiring of offshore workers, even as U.S. hiring is expected to decline by approximately 3%, indicating that some companies are continuing to seek low-cost labor overseas. (See "The New Calculus of Offshoring.")
Norman Boling Jr., CFO of Compact Power, a small manufacturer of landscaping and construction equipment, has seen his workforce shrink from more than 500 employees to 350 over the past year. But the company's service business, which maintains machinery for companies like Wal-Mart and Best Buy, has remained stable, and Boling is exploring new avenues for growth.
"I think we will staff back up," says Boling, "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 will lead to new hiring.
With a year of turmoil behind them, some CFOs are embracing the lessons of the recession. "It's good for everyone to sharpen their pencils and ask, 'Do we need all this?'" says David Joaquin, finance chief at Lyons Group, a Boston-based company that oversees 25 restaurants. Joaquin says revenues have held up well, but he is closely tracking capital expenditures. "New spending will depend on a very specific, situation-by-situation analysis," says Joaquin. "In the past, we might have given a restaurant manager $300,000 to replace equipment if he gave us a list of 10 things he wanted. Now, it will literally be, 'Let's replace this fryolator.'"
Still, Lyons Group plans to grow, with at least three new venues on the way. "These times provide a great opportunity to go out and strike a great deal," says Joaquin. As finance executives grow more confident about their businesses' chances for survival, perhaps more will dare to go out and do great deals — and create some jobs while they're at it.
Kate O'Sullivan is a senior writer at CFO.