Economy Stabilizes but Employment to Lag

We recently surveyed CFOs of 650 companies in the U.S. and nearly 900 in Europe and Asia. The economic outlook of these finance chiefs is improving relative to what we heard last quarter. CFO optimism about the macro economy has improved around the world, though optimism still remains below its long-run average. In the U.S., public company earnings are expected to grow by 3 percent over the next year, an improvement from the 4 percent decrease reported in last quarter’s survey. Wages, R&D, and advertising budgets are expected to increase slightly this year, all improved from last quarter.

Overall, it appears that the Great Recession is ending and economies around the world are stabilizing. While this is good news for the macro economy, what about the workforce? How many recently laid-off workers will find new employment as the recession ebbs?

U.S. CFOs tell us that their workforces are about 6 percent below year-end 2007 levels on average. In manufacturing, construction, and media, employment levels are 12 percent or more below 2007 levels. Even worse, over the next year finance chiefs say that they will reduce employment, not increase it, indicating that the unemployment rate will continue to rise in the near term.

How long will it take for employment to return to pre-recession levels? After unemployment peaks sometime next year, U.S. firms expect to fill only about half of their former positions by the end of 2012, meaning that employment growth will be slow for some time to come. Another one-fourth of former jobs should return in 2013 or later. A sobering 25% of jobs may be permanently lost. Hardest hit is the communications and media industry, where one half of laid-off employees may never be rehired.

There are a number of ways the economy can return to growth without any proportional increase in employment. First, some companies are using furloughs to reduce the number of hours worked by current employees. These firms can eliminate the furloughs, adding hours of work without hiring additional employees. After the furloughs are gone, some firms may ask employees to work overtime, again gaining productive hours without any new hires. In addition, offshore outsourcing is expected to rise by about 3 percent over the next year, meaning that some employment growth to support increased activity will occur, but that employment growth will take place outside of the United States. Finally, finance executives tell us that their companies have streamlined many processes in their efforts to cut costs during the course of the recession, and plan to run their businesses in accordance with this newfound “lean and mean” approach in coming years. This will keep a lid on employment growth as companies continue to increase the productivity of those employed.

As a measure of just what it will take to return employment to year-end 2007 levels, CFOs say that, on average, sales revenues will need to increase by 37 percent from current levels in order to justify re-hiring those 6 percent of employees that have been laid off in the past 20 months. This is more evidence that firms plan to rely on worker productivity and lean, efficient operations to fuel growth.

U.S. companies also tell us that they plan to cut capital spending by 3 percent over the next year. And more than half of low-rated companies (BBB or lower) say that they are still suffering from credit market constraints.

Overall, the economic outlook has improved since last quarter. However, our analysis indicates that the recovery will be lethargic, with employment growth lagging behind the rest of the economy.


John Graham is the D. Richard Mead Jr. Family Professor of Finance at DukeUniversity’s FuquaSchool of Business

Kate O’Sullivan is a Senior Writer at CFO Magazine

Each quarter the DukeUniversity / CFO Magazine Global Business Outlook Survey polls thousands of chief financial officers around the world. The most recent survey reflects the views of 1,537 CFOs in the U.S., Europe, and Asia. The survey has been conducted 54 consecutive quarters. The most recent survey contains much information not reported above. See for more details.

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