CFO Economic Optimism Continues to Rise

Nearly nine out of 10 (88%) of CFOs are more optimistic about the US economy this quarter than last, with a miniscule 1% reporting less optimism, up from only 74% reporting more optimism about the economy and 7% less last quarter (See  CFOs Giddy About US Economic Prospects ).  Further, more than two-thirds (69%) of the CFOs are cheerful about their own company prospects, compared to 67% last quarter, according to the year-end release of the Financial Executives International (FEI) and Duke University Fuqua School of Business CFO Outlook Survey.

Eighty-eight percent of CFOs are especially pleased with the outlook in corporate earnings, anticipating an increase on average of 14% over the next 12 months. This is brought on by a continued surge in productivity; a number the survey respondents say will be up 4% in 2004.  

Much of the reason for such strong corporate earnings projections is the expectations for increases in employment and capital spending.   Two-thirds of the surveyed companies plan to add to head count in 2004, while only 14% say they will reduce employment.   Overall, the survey expects the number of employees to net a 2% increase in the coming year.   Similarly, 63% of companies expect to increase capital spending, with an average increase of 5%.

With higher employment figures, CFOs anticipate an increase in wages by 3.4% in 2004.   Also on the rise, is overtime, which those polled said would be up 1.4% next year, slightly less than last quarter’s 1.9% growth projection.

“Corporate America is beginning to loosen their purse strings, and they’re beginning to hire as well,” noted John Graham, a finance professor at Duke University and the director of the survey.  “These are key drivers to a robust economy.”

The overall sense of good will also shows up in higher expectations about the gross domestic product (GDP).  Last quarter, CFOs expected the GDP to increase by 2.9%, while this quarter GDP is expected to grow by 3.6% over the coming year.

Positive Influence

The CFOs also identified the economic factors that would have the most positive impact on their companies in 2004.   The most popular response was corporate investment, cited by slightly more than one-quarter of CFOs as having the most positive impact.  That was followed by improving US employment and low interest rate levels.

On the other side, 33% said health-care costs would have the most negative influence on their companies in 2004.   In fact, nearly all CFOs (98%) expect a hike in health-care costs at their company, with the average projected increase at 11%.

The survey also queried CFOs about the impact of the ongoing mutual fund scandal in their companies’ retirement plans.   Roughly a quarter (23%) has already made changes to the investment options available to employees in their 401(k) plans, and another 29% are considering changes.  The remaining companies (48%) do not plan to make changes at this time.

“We’re seeing some of the wide reaching ramifications of mutual fund wrongdoing,” noted Colleen Sayther, President and CEO of FEI. “Companies have some hard decisions to make in terms of what’s a reasonable response to an allegation about a 401(k) provider, but survey results indicate companies are voting with their feet.  Defined contribution vendor relationships are typically very long term.  The fact that half the firms in our survey may change their current investment vehicles represents a sea change.”

Also on the chopping block at some firms is the use of stock options.   Thirteen percent say they will eliminate the use of stock options, and another 60% plan to reduce stock option compensation. The remaining 27% of companies say that they will not change the use of options in their employee compensation plans.   Among the public companies that will decrease the use of stock options, 28% will not replace the options with any other form of compensation.

Results of this survey are available at  http://www.cfosurvey.org .