CFOs in holding pattern as economic uncertainty continues

The robust growth needed to fuel a full-fledged economic recovery in the United States and Europe does not appear likely to occur early in 2013, based on numerous surveys of financial executives’ confidence.

In the US, higher health-care costs associated with the Patient Protection and Affordable Care Act (PPACA), and uncertainty over the “fiscal cliff” are associated with declining optimism in the United States. The prospects of a possible bailout request by Spain has added to Europe’s economic woes.

In that uncertain environment, US CFOs surveyed by Financial Executives International (FEI) and Baruch College rated their optimism about the US economy as a median of 51.6 on a scale of 0 to 100. That is down from 55.4 in the previous quarter, and it’s the lowest mark since the third quarter of 2011.

European CFOs (the survey included executives in Italy and France) anticipate decreases at their companies in capital spending (an average of 4.4%), hiring (2.3%), average compensation (0.6%), technology (0.4%) and inventory (0.1%) in the next 12 months.

Baruch College Professor of Economics and Finance Linda Allen said CFOs are taking a wait-and-see attitude instead of aggressively pursuing growth. “They’re sitting on the fence, and they’re keeping their business stable, the best that they can,” she said. “… What we’re seeing is really a holding pattern, and CFOs are not going to get off the fence until something gives them the confidence that sales will go up.”

That holding pattern has been consistently reflected in several recently released surveys:

  • Just 21% of CPAs in executive positions said they are optimistic or very optimistic about the US economy in the next 12 months in the AICPA Business & Industry Economic Outlook Survey for the fourth quarter of 2012. That was down one percentage point from the previous quarter.

  • The median US GDP growth projection for 2013 in an Association for Financial Professionals (AFP) survey was 1.7%, which is considered a modest pace for economic growth and job creation.

  • Thirty-one per cent of US CFOs – an increase of ten percentage points from the summer of 2012 – said the US economy will worsen in the next six months in a Grant Thornton LLP survey. Thirty per cent said the economy will improve, and 39% said it will remain the same.

“While many companies don’t foresee the economy taking a turn for the worse in the next six months, there is still an absence of improving economic conditions that are needed to propel our country into a growth mode,” Grant Thornton CEO Stephen Chipman said in a statement. “Only 34% of companies expect their financial prospects to improve in the next six months, which means that reluctance to increase hiring and make capital investments will continue to bog down our economy.”

Hiring and capital investment plans were two factors that led Allen to describe the FEI/Baruch College survey outlook as pessimistic. Although 58% of US CFOs plan to hire in the next six months, they projected an average hiring increase of just 2.5% over the next year, down from 4.0% the previous quarter. Just under half (47%) of European CFOs predict that their companies will hire additional staff in the next six months.

A meagre 29% of US CFOs and 24% of European CFOs predicted increased interest in making acquisitions.

“CFOs are not expecting anything to turn around really soon,” Allen said. “They’re going to hold their position and keep everything going and hopefully live to fight another day when things improve.”

Fiscal cliff’s effects

Surveys were inconsistent with respect to the effects of the fiscal cliff, the combination of tax increases and spending cuts in the United States that will take effect at the beginning of 2013 unless political leaders can reach a compromise and make adjustments.

In the AFP survey, 36% of respondents said their companies already have taken action because of the fiscal cliff, and 52% said they would take action if the fiscal cliff is not averted. The most common measures taken by organisations that already have acted were reducing or delaying capital spending (55%) and freezing or reducing hiring (52%).

Eight-five per cent of US CFOs and 63% of European CFOs said in the FEI/Baruch College survey that the way the fiscal cliff plays out will have a significant effect on their nation’s economy. But respondents in the Grant Thornton survey seemed less concerned about the fiscal cliff. More than half (53%) said the fiscal cliff would not affect the first six months of 2013 for their companies, and three in five do not consider the fiscal cliff resolution an obstacle to making business decisions.

“The turbulent years of the recent past have made businesses more adept at managing through economic uncertainty,” Chipman said. “It is reassuring to see that CFOs are confident that we will not take any steps backward in our progress.”

Eye on health care

Another concern for US businesses is the costs associated with health care as a result of the PPACA. On average, US CFOs predicted that health-care costs would rise 8.4% over the next 12 months. European CFOs, whose companies aren’t subject to the US health-care law’s requirements, projected just a 1.7% increase.

It appears, though, that at least some of those costs will be passed on to employees. Forty-two per cent of US CFOs said their companies would increase the employee health-care contribution in 2014 if the PPACA is fully implemented in 2014. And 41% said their companies would need to decrease the quality of benefits in 2014 if the PPACA is fully implemented in that year.

Despite concerns over the November election’s effect on the fiscal cliff and the health-care law, Allen said the economic situation is even more unsettled in Europe.

US CFOs rated optimism about their companies’ financial prospects at a median of 62.7 on a scale of 0 to 100, down from 67.8 last quarter. Optimism about their own companies among European CFOs was up slightly from the previous quarter, but measured just 55.7.

“The uncertainty about the Spanish economy and the resulting political situation, where there is political and social unrest on top of financial and economic instability, is really a problem,” Allen said. “The long-term future, and even the medium-term future of the European project is, I think, quite unstable.”

The issues that concern financial executives are somewhat different in Europe and the United States. But it appears as though both regions share the lack of stability that many say is necessary to promote strong growth.

“Uncertainty and instability is an anathema to business people,” Allen said. “So I think in this uncertain world, CFOs have communicated their unwillingness to take really strong action until some of that uncertainty is resolved.”

Ken Tysiac ( is a CGMA Magazine senior editor.