The U.S. CFO Optimism Index dropped yet again in the latest Duke University/CFO Magazine Global Business Outlook Survey, to 51 out of 100. Down from 52 last fall and 59 at the beginning of 2012, optimism levels among senior finance executives dipped late last year in part because of mounting concern about the fiscal cliff. Worries about consumer demand and government policies also rate as top concerns in the survey, now in its 67th consecutive quarter.
“I’m not as optimistic as I was three months ago,” says Hugh Regan, CFO at InTEST, a publicly traded manufacturer of semiconductor testing equipment. In addition to worries about the fiscal cliff and the impact of economic uncertainty on businesses, Regan says he is concerned about consumer confidence. He is also struggling to construct a reliable forecast for the new year. Says Regan: “In our business, we usually have three months of clear visibility and another three months of foggy visibility. Now, I joke that I can’t see to the end of the parking lot.”
Like Regan, many finance chiefs were focused on the fiscal cliff as 2012 drew to a close, with 63% supporting a proposal like the Simpson-Bowles plan, combining spending cuts with tax increases to resolve the government’s fiscal crisis. Another 13% called for a more aggressive plan, with measures like eliminating deductions to raise revenue more quickly. Just 10% said they backed a short-term compromise that would avoid the fiscal cliff but not reduce the deficit.
In light of the compromise that was reached in the earliest moments of the new year, “CFOs are probably a little disappointed in where we are now,” says John Graham, professor of finance at Duke’s Fuqua School of Business and director of the survey. “I think CFOs are relieved that there was a deal, but dissatisfied in general.” Had a deep and meaningful compromise been struck, adds Graham, “that might have opened the door to a much improved 2013.” As it stands, the deal means the year may look a bit better than CFOs were projecting before the agreement, but “it doesn’t seem there’s much cause for rejoicing,” says Graham. “It’s going to be a muddle-along year.”
CFOs’ spending plans for 2013 are conservative, and are down across the board from where they were last fall. On average, U.S. finance chiefs say they expect capital spending at their companies to increase by just 3% in the next 12 months, down from 4% last quarter in the fourth consecutive quarter of declining spending expectations. CFOs plan to cut research-and-development spending by 1% and say they will increase spending on technology by only 2% on average this year. In another decline from last quarter, advertising and marketing spending are also slated to increase by just 2%.
Hiring expectations are equally restrained, with U.S. finance chiefs planning to expand full-time staff by a meager 0.1% in 2013. CFOs plan to cut back on temporary staff and say they will increase their offshore outsourced workforces by just 0.5%. Should these predictions hold true, notes Graham, the unemployment rate will rise, as workers will be entering the job market in greater numbers than companies will be hiring.
Finance chiefs also plan to keep a tight rein on spending on employee benefits, with many of those who reduced benefits during the recession saying they have not yet restored them to prerecession levels. Eighty-four percent of CFOs say their firms will not be contributing to health-care benefits at prerecession levels in 2013, and 41% say employees are still working fewer hours than they were prerecession.
Still, even as they worry about the broader economy, some finance chiefs see cause for optimism at their own businesses. Jim Ciaramella, controller at Lasco Engineering Services in Michigan, says he expects the economy to “continue to bump along,” but adds that Lasco is forecasting some sales growth and plans to add staff as it expands into new market segments.
Chad Stone, CFO at Renewable Energy Group, a publicly traded producer of biodiesel fuel, says the company plans to hire and continue to invest in upgrading plants and equipment. Stone says he expects continued modest improvement in the economy overall. “I think there’s positive momentum that may be dampened somewhat by higher taxes and other costs of regulation. But I don’t think that will overcome the momentum,” he says.
The Global Outlook
Optimism among Europe’s CFOs rebounded at year-end, although it remains below the levels seen in Latin America and Asia. Latin America’s finance chiefs lead the world in their positive outlook, ranking their optimism at 66 out of 100, compared with 62 in Asia and 52 in Europe. CFOs in the region say they plan to expand their full-time workforces by 3% on average in 2013 and expect to boost wages by 7%. In stark contrast to their U.S. peers, CFOs in Latin America plan to increase capital spending by 13% on average in the year ahead.
Growth expectations also remain healthy in Asia, with the exception of Japan, where optimism and spending plans significantly lag the rest of the region. On average, CFOs in Asia plan to increase full-time staff by 5% while also boosting wages by 7%.
In Europe, CFOs continue to plan layoffs, saying they will shrink their staffs by 1% on average in 2013. They plan to increase capital spending modestly, but say worker hours and benefits will remain below their prerecession levels this year.