Published June 05, 2013
Corporate CFOs grew more bullish on the U.S. economy during the second quarter, but that optimism doesn’t necessarily trickle down to plans to hire or deploy cash reserves.
Those and other findings from the newly-released survey of CFOs by Duke University/CFO Magazine paint a picture of continued slow improvement in the U.S. economy rather than a dramatic acceleration that might force the Federal Reserve to scale back its stimulus efforts.
Just 48% of U.S. and European companies intend to spend their cash holdings during the next 12 months, compared with 60% to 70% of emerging-market companies, the survey reveals.
CFOs said their companies plan to increase capital spending by just 6.1% over the next 12 months, up just slightly from 5.3% in the first quarter and 4.9% in the second quarter of 2012.
“I think what the CFOs are saying is we’ve loaded the gun, we just have to decide to pull the trigger,” said Sam Stovall, chief investment strategist at S&P Capital IQ.
U.S. officials and lawmakers have sought to persuade Corporate America to unleash the mounting levels of cash sitting on the sidelines. Cash and short-term investment balances for S&P 500 non-financial companies stood at $1.27 trillion at the end of 2012, up 6.1% year-over-year, according to FactSet (FDS).
Executives who plan on hoarding more cash told the Duke survey they are likely to do so as a hedge against economic uncertainty and due to a perceived lack of adequate investment opportunities.
CFOs expect to add just 0.8% to their full-time payrolls over the next 12 months, down from 2.2% as of March and 2.5% a year earlier. That increase likely wouldn’t be enough to meaningfully bring down U.S. unemployment.
Corporations now plan to grow wages and salaries by an average of 2.5% over the next year, down from 3.1% in March and 2.6% in June 2012.
“Most CFOs are not impulse shoppers. When it comes to big-ticket items, most consumers are not impulse shoppers. Would you go out and buy a Bentley on a whim?” said Stovall.
Dampening Earnings Expectations
The reluctance to open corporate coffers could be tied to reduced forecasts for earnings. Surveyed CFOs see 12-month earnings expanding 7.5%, down from expectations for 9.6% in the first quarter and 10.9% in the year-earlier period.
This largely matches projections from analysts polled by Capital IQ, who see 2013 earnings growth of 6.74% for S&P 500 companies, down from estimates for 12.5% in July.
Despite these tepid numbers, confidence in the U.S. economy continues to rise.
The survey’s business optimism index jumped to 61 on a scale of 0 to 100 during the second quarter, up from 55 during the first quarter. That marks just the second time since 2007 that the index has climbed above its long-run average value.
However, it’s worth noting that CFOs didn’t grow increasingly bullish about their own companies. The survey’s own-company optimism level inched up to 64.2 from 63.8 in the prior quarter and 64.1 the year before.
“This may be an indication that companies are being cautious about their own plans until they have more assurance that the economic improvement they expect to see will last,” Celina Rogers, vice president of research at CFO Publishing, wrote in the report.
Corruption Concerns Continue
The CFO survey also highlights serious concern about business corruption, which is seen as nearly 10 times more prevalent in Africa than in the U.S.
About 33% of U.S. firms that primarily export say they have avoided doing business in a foreign country due to jitters about business corruption in that country.
While just 6% of CFOs surveyed indicated fraud and bribery is a problem in the U.S., 16% said it is a significant risk factor in Europe, 33% in Latin America, 36% in Asia and 50% in Africa.
CFOs said the impact of corruption in Africa can be seen through higher prices, reduced government tax collection, poorer product quality and diminished competition.
“Most areas of the world have a long way to go to reach the low levels of corruption in North America,” Campbell Harvey, a professor at Duke, said in the report. “Pervasive corruption increases business costs both directly and indirectly -- leading to lower investment and employment."
The U.S. has a serious advantage in terms of corruption, but lags behind its global peers on the corporate social responsibility and sustainability front.
Just about 50% of U.S. CFOs rate the CSR and sustainability issue as “moderately” or “very” important items in their business strategies, compared with 63% in Europe, 67% in Asia, 76% in Latin America and 83% in Africa.
Two-third of U.S. companies that consider this an important area list “it’s the right thing to do” as one of their top three reasons. Other top rationales include improving external image/brand (61%) and improving employee morale and hiring (49%).