Amid lingering concerns over the inflation rate, chief financial officers' overall confidence in the global economy declined at the start of the second half of the year, according to the most recent survey of CFOs conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business.
U.S. CFOs continue to demonstrate slightly higher optimism than their European counterparts, and have a much stronger outlook for hiring, despite their expectation that unemployment rates will remain high.
While U.S. executives remain stable in their business outlook and expect large gains in net earnings, looming fears of the impact of an increase of the debt ceiling and the possibility of a double-dip recession are prompting them to extend their forecasts for the start of a U.S. economic recovery by more than a year to the second half of 2012 or beyond.
The quarterly "CFO Outlook Survey" polls CFOs of public and private businesses in the U.S. and Europe (Italy and France) on their economic and business confidence and expectations.
The second quarter CFO Optimism Index for the global economy experienced a decline for U.S. CFOs from the previous quarter (61.70 to 59.40 in Q2), but remained higher than their counterparts in Europe, which also dipped (58.90 to 55.10 in Q2).
U.S. CFOs' optimism in their own companies remained consistent with the previous quarter (72), and demonstrated a higher level of confidence in their businesses than did European CFOs (down to 63.20 from Q1's 66.10).
However, the confidence among U.S. CFOs in the U.S. economy weakened. The index dropped five points from the previous quarter (59.00 from Q1's 64.10) and dropped below their optimism for the global economy.
Over the next 12 months, CFOs on both sides of the pond are expecting positive increases in several areas of their businesses: U.S. CFOs expect a 21 percent increase in their net earnings, an 11% increase in revenue and a 15 percent increase in capital spending, while CFOs in Europe anticipate more modest increases in revenue and net earnings (6% each) and only a 4% increase in capital spending.
In light of rising commodity prices, inflation levels continue to be an area of concern for CFOs.
When asked to rate their inflation concerns on a scale of one to five (with five being the highest level of concern), 70 percent of U.S. CFOs and 66 percent of European CFOs selected a three or higher.
While more than half feel their level of concern was unchanged from last quarter, over a third of both U.S. CFOs (39%) and European CFOs (36%) expressed more concern this quarter.
"Globally, CFOs continue to display caution. Inflation concerns and fears about the recovery may further delay new hiring and investing," says John Elliott, Dean of the Zicklin School of Business at Baruch College.
"While U.S. CFOs have high expectations for earnings growth and generally hold a more positive outlook than Europeans about the global economy and the future of their businesses, their declining confidence in the U.S. economy reflects uncertainly. Decisions from Congressional leadership and the President will be especially significant for U.S. businesses in the coming months."
While CFOs expect oil prices to remain high, they are readjusting their outlooks to a more conservative figure. Ninety-seven percent of U.S. CFOs feel that the price of oil per barrel will be at $140 or lower in the next six months - a stark contrast with last quarter, when nearly 70 percent of U.S. respondents felt that the price of oil per barrel would be at least $140 or higher in six months.
Similarly, the large majority (92%) of European CFOs expect the price of oil to remain at $140 or below, compared to last quarter when 71 percent believed it would remain at $140 or above.
U.S. CFOs were asked specifically about their reaction to the U.S. government's decision to release oil from its reserves, which are mixed. While 46 percent are against the decision, nearly a third expressed support for the decision (31%) and close to a quarter are undecided (23%).
In the wake of recent security breaches at major multi-national firms, 61 percent of U.S. CFOs are currently allocating more funds to data security, or at least considering it, compared to 55 percent of European CFOs.
Of those who are increasing security budgets, U.S. CFOs are expecting an 18 percent increase, while European CFOs are increasing budgets by 16 percent.
"In this day and age, companies are becoming increasingly aware of the frequency of security breaches and are more cautious about the dangers and potential financial ramifications of their own data systems being breached," says Marie Hollein, CEO of Financial Executives International.
"While budgetary restraints may not allow some companies to invest in sufficient protection systems, it is clear that companies are beginning to think about it."
Majority of U.S. CFOs Plan to Hire in Next Six Months
The high unemployment rate continues to be a mounting global concern, and CFOs on average feel that the rates will remain at high levels for the next six months to 12 months: U.S. CFOs believe this rate will hover around nine percent, and European CFOs think it will remain near eight percent.
However, the survey revealed differences in the ways that CFOs are responding toward plans for hiring. Over half of U.S. CFOs (57%) plan to hire additional employees at their companies in the next six months, while the majority of European CFOs (52%) stated that they do not have plans to hire within that timeframe.
CFOs are most commonly seeking mid-career professionals to fill their staff (79% of U.S. and 63% of European CFOs), followed by entry-level college graduates (40% of U.S. and 35% of European CFOs).
CFOs in the U.S. are also paying higher wages compared with the same time last year. While 54 percent of U.S. CFOs have seen wage levels rise, the majority of those responding in Europe (57%) believe they have stayed the same.
Debt Ceiling, Health Care Costs and Economic Recovery
As the debate over a debt resolution in Washington continues, and many are bracing for the possibility of a U.S. default, U.S. CFOs differ in their reaction to potential outcomes.
While close to half of respondents (46%) believe that raising the debt ceiling will have a negative impact on the U.S. economy, more than a quarter (27%) feel there would be no impact to the economy, and a nearly identical amount feel the result of raising it would be positive.
The biggest concerns toward raising the debt ceiling are potential tax increases (31%), followed closely by political gridlock and conflict over the decision (26%) and potential reduction in the U.S. debt rating (25%).
With their optimism in the U.S. economy on the decline, a relatively lower number of U.S. CFOs this quarter feel that the U.S. is in the midst of, or drawing close to, a recovery. Only 27 percent of U.S. CFOs believe that a recovery has occurred, and more than half (55%) predict that a recovery will not take place until the second half of 2012 or beyond.
For nearly half of U.S. CFOs (47%), a lowered U.S. unemployment rate was perceived to be the most telling indicator of an economic recovery, which is followed by a rising gross domestic product (GDP) (22%) and a rise in consumer spending (17%).
U.S. CFOs expect a nine percent increase in health care costs over the next 12 months and, when asked about the impact of the Patient Protection and Affordable Care Act, respondents in the U.S. on average revealed a three and a half percent increase in related costs since the start of the year. However, nearly a third (32%) are not taking actions to offset costs. The most common actions to offset costs are increasing the employee co-pay (45%) and reducing benefits for employees (28%).
Bernanke Rating and Additional Findings
When asked to give an overall letter grade (A (best), B, C, D or F (worst)) on the performance of Federal Reserve Chairman Ben Bernanke with regard to his recent actions in responding to the current U.S. financial situation, most U.S. CFOs assigned him a B (43%). Additional results from the survey include global CFOs' predictions on their country's rate of inflation and U.S. CFOs' use of repatriated earnings.
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