U.S. CFOs are growing more pessimistic about the American economy, with hiring and spending plans significantly weakening since last quarter. Finance chiefs say that their business spending plans are not sensitive to moderate changes in interest rates, suggesting that there is little that the Federal Reserve can do to stimulate investment at this time. In addition, CFO concerns about Europe also have increased in the past three months.

These findings are included in the most recent Duke University/CFO Magazine Global Business Outlook survey, which concluded Sept. 7. The survey asked nearly 1,500 CFOs from a broad range of public and private companies about their expectations for the economy.

Summary of Findings

• U.S. finance chiefs say that interest rate reductions of 1 or 2 percentage points would not alter their capital spending plans, indicating that potential monetary policy actions by the Federal Reserve are unlikely to spur the corporate sector to action.
• The Optimism Index for CFOs in the U.S., Asia, Latin America and Europe all dropped this quarter compared to last quarter. -- CFOs plan to increase hiring by 1.5%, capital spending by 3.7% and earnings by 6%, all down from last quarter.

Hiring, Spending, Earnings, Causes of Slow Growth

Corporate plans for earnings, spending and hiring all softened this quarter. Earnings for public U.S. firms are expected to increase 6% over the next year.

CFOs say they plan to increase capital spending by just 3.7% over the coming 12 months, down from 4.9% last quarter and 7.3% in the spring.

Hiring is expected to increase by 1.5% in the next year, down from greater than 2% growth reported in the last two surveys.

“The weak business spending plans are troubling because this had been one of the strengths within an overall weak recovery,” said John Graham, a professor of finance at Fuqua and director of the survey. “Employment growth has also slowed, with a 1.5% growth rate suggesting only modest improvement in the unemployment rate.”

“Three out of four companies said that they are delaying or being extremely cautious about hiring and capital spending,” added Graham. “More than half of responding CFOs listed weak demand for their products, high unemployment, budget deficits and concerns about the presidential election as factors for cautious hiring and spending. CFOs are also concerned about potential changes to tax policy, the regulatory environment and global economic turmoil, which have caused their firms to pull back.”

Fed Policy

The Federal Reserve’s attempts to reduce interest rates will have little impact on corporate investment, say CFOs. Ninety-one percent of firms say their spending plans would not change if interest rates were to fall by 1 percentage point. Eighty-four percent say a 2% rate reduction would not affect their spending plans.

“This is stark evidence that QE3 would be a wasted effort,” said Campbell Harvey, a finance professor at Duke’s Fuqua School of Business and founding director of the survey. “The CFOs are saying that it is naïve for the Fed to think that dropping interest rates will spur investment in current economic conditions. I certainly hope the Fed gets the message for their Sept. 13 meeting.”

Harvey called it “amazing that all the focus is on interest rates when they are already at 50-year lows. We also asked about the impact of increased borrowing costs. Nearly 94% of CFOs would make no change in their investment plans if borrowing rates jumped up by 1%.

“The survey’s bottom line is that the Fed has run out of bullets. The best thing they can do is to foster stability. Anticipating a QE3 or QE4 or some other unconventional policy introduces uncertainty which reduces the chances that firms make capital expenditures,” Harvey added.

The CFOs noted that an overall weak global economy has reduced the need for many firms to invest. Among companies that plan to invest, many self-fund their investment out of cash stockpiles. Even among those firms that need to borrow in order to invest, many say interest rates are already so low that further reductions will not alter their business spending.

Increased Pessimism and Top Concerns

Forty-four percent of U.S. CFOs say that have become more pessimistic about the economy, twice as many as the 22% that say they have become more optimistic. The Optimism Index decreased to 52 (on a scale from 0 to 100), down from 56 last quarter and 59 in the spring.

“The drop in optimism is worrisome for the U.S. because historically it foretells slower economic activity over the next year,” said Kate O’Sullivan, editorial director at CFO Magazine. “Optimism is also falling in Asia and Europe.”
U.S. businesses list a number of concerns that have reduced their optimism, including the ability to maintain profit margins, the cost of health care, difficulty in attracting and retaining qualified employees, and maintaining employee morale. The list of external concerns is topped by weak demand for products, federal government policies, intense price pressure and competition, and global economic instability.

“CFOs have become increasingly worried about Europe,” O’Sullivan said. “Half of CFOs report that the economic climate in Europe is negatively affecting their firms, and 63 percent say that their firm would be negatively impacted if the Eurozone were to unravel.”