The U.S. corporate sector is doing its part to help the economic recovery – for now. Earnings and capital spending increases are expected to hover around 10% in the next year. However, optimism about the future among financial executives has fallen back to near-recession levels, and the corporate sector says that it can only hold out for six to 12 months without improvement in the rest of the economy.
The 569 U.S. CFOs that we recently surveyed rated their optimism about the U.S. economy at 49 on a scale from 0 to 100, down from 58 last quarter, and the lowest level since optimism rated 40 in the depths of the recession. This drop is worrisome given its proven predictive accuracy. Moreover, the dramatic drop in U.S. optimism contrasts with moderate improvement in European optimism (to 58) and continued optimsm in Asia (around 70 on the 0 to 100 scale).
The decline in optimism in all likelihood reflects the persistence of several overriding internal and external concerns. For the past 8 quarters, CFOs have listed availability of credit, consumer demand, and federal government policies as chief external worries. Price pressure and inability to forecast, and hence difficulty in planning for the future, have topped the list of internal concerns for a comparable period.
For the second quarter in a row, and the second time in the 58-quarter history of the survey, maintaining employee morale is among the top company-specific concerns. After a brief hiatus, health care costs returned to the list–no surprise, given that CFOs expect corporate health care payments to rise 10 percent in the next year.
Due to this pessimistic outlook, U.S. companies plan only small increases in their workforces. Employment should increase by about 0.7% over the next 12 months, enough to offset normal growth in the U.S. labor force but not enough to significantly reduce the national unemployment rate.
Perhaps the most worrisome news from the survey is that U.S. companies say that they can maintain their current level of capital spending and earnings growth for only six to 12 months unless the rest of the economy improves. Unfortunately, CFOs do not believe that recent financial reform will save the day – with only 5% saying that reform will help their firms. That leaves growth in the world economy as the best hope to pull the U.S. out of its doldrums.
How much can the world economy help? The Obama administration hopes to increase exports by 100% over the next five years. U.S. finance executives expect about half that. They think export sales will rise from about 9% of sales to 11% in five years–a 50 percent increase (assuming that the overall economy grows by 25% over five years–4.5% annual growth coming from 2.5% real GDP growth plus 2% inflation). According to our calculations, this would add at most 0.5% to annual GDP growth.
Another possible source of growth for the U.S. could be the massive cash holdings held by profitable companies. Again, we hear mixed news. Half of companies tell us that they will begin to spend their cash, primarily for capital investments, acquisitions, and to pay down debt. The other half, however, will keep hoarding cash because of overall heightened economic uncertainty and concerns about possible future liquidity problems.
Credit market conditions continue to hamper small firms. Half of small firms say that their borrowing options have not improved since Fall 2009. Since small firms in aggregate produce much of the job growth in the U.S. economy, this situation does not bode well for the employment picture.
In contrast to the U.S outlook, the European outlook has improved slightly. Employment is expected to incease over the next year by 0.5%, which, while small, is the first predicted increase since the recession began.
The best news from around the globe is that Asian CFOs expect strong growth in employment, capital spending, and earnings in the coming year. Interstingly, Asian firms also indicate that they expect slower growth out of the manufacturing sector due to recent wage increases.
Overall, our hope is that Asia and slightly improved Europe can help lift the U.S. out of its current economic predicament. Our expectation is continued slow growth in the U.S. for the forseeable future.
John Graham is the D. Richard Mead Jr. Family Professor of Finance at Duke University’s Fuqua School of Business
Julia Homer is Executive Vice President of Content at CFO Publishing LLC
Each quarter the Duke University / CFO Magazine Global Business Outlook survey polls chief financial officers around the world. The most recent survey reflects the views of more than 900 CFOs in the U.S., Europe, and Asia. The survey has been conducted 58 consecutive quarters. The most recent survey contains details and information not reported above. See http://www.cfosurvey.org for more details.