Capital Spending and Employment Growth to Slow

Jun 3, 2005

Allen Bernard

Chief financial officers say that employment and capital spending will slow over the next year. The CFOs point to inflationary pressures on input costs, such as high fuel and health care costs, as well as increased costs of short-term borrowing.

They also say they lack the pricing power to make price increases stick for their own products.

These are some of the findings of the June 2005 Duke University/CFO Magazine Business Outlook survey, which asks CFOs from a broad range of public and private companies globally about their economic projections.

The survey was concluded May 30 and generated responses from 602 CFOs, including 365 from the United States, 153 from Asia and 84 from Europe. Results in this release are for the U.S. firms unless explicitly stated otherwise.

In a separate survey conducted by IDC for its FutureScan series, indicates that IT buyer optimism continues to be dampened by macroeconomic realities.

While expectations for IT spending over the next 12 months continue to hold steady at just over seven percent, more than two percentage points higher than IDC's current forecast, enough uncertainty exists to keep any optimism in check.

"There is a lot of guarded optimism on the demand-side," said Carol Glasheen, program vice president for IDC's Global Research Organization. "Even though the macroeconomic outlook has improved considerably in 2005, a number of unknowns remain on the horizon. Against this backdrop, many executives seem to be adopting a 'wait-and-see' attitude toward the next phase of the recovery."

Buyer optimism remains apparent, however, in the fact that cost-cutting is no longer the top priority. Instead, IDC surveys indicate that users are focusing their efforts on infrastructure refreshes and new initiatives that will drive revenue and productivity.

"Basically, users are preparing for renewed economic growth, even if they're not entirely convinced that the recovery will continue," added Glasheen.

For their part, CFOs are not as upbeat. This quarter, 40% of U.S. CFOs are more optimistic about the economy than they were last quarter, while 26% are less optimistic. This continues the downward trend in optimism over the past year.

Forty-six percent of CFOs were more optimistic last quarter, 54 percent were more optimistic two quarters ago and more than 70 percent were more optimistic a year ago.

"This is a new low for CFO optimism," said John Graham, professor of finance at Duke's Fuqua School of Business and director of the survey. "We've found that this optimism index predicts future economic growth quite well. In a situation like this, where the optimists barely outweigh the pessimists, we can expect to see sluggish economic growth."

Asian CFOs share the same muted optimism. "In contrast, European CFOs are explicitly pessimistic," Graham said. "About half of the European CFOs are more pessimistic about their national economies relative to how they felt last quarter. Only 16 percent are more optimistic."

To understand the causes of this reduced optimism, the survey asked executives to choose the top three items, from a list of 15, that are concerns for their companies.

For the second quarter in a row, health care costs top the list of concerns. In the U.S., nearly 40% of CFOs cite high health care costs as a top issue.

CFOs expect health care costs to increase by almost nine percent in the coming year. High fuel prices, increased interest rates and reduced pricing power round out the top four concerns for U.S. CFOs.

Not only do U.S. CFOs list rising interest rates as one of their top current concerns, they say additional interest rate increases will slow U.S. economic growth.

In part due to higher interest rates, corporate executives are reducing capital spending plans. While two-thirds say they will increase capital spending in the next 12 months, the increase will average only 4.5% (down from 5.4% last quarter).

"This rate of capital spending increase is barely sufficient to replace depreciated assets," noted Don Durfee, research editor of CFO Magazine. "On the bright side, we expect to see a 10% increase in earnings next year, down slightly from an expectation of 10.4% expressed last quarter."


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