Survey: Economic Optimism Down Slightly in U.S.; Europe Shows Modest Gains

MORRISTOWN, N.J. and NEW YORK, May 5, 2011 /PRNewswire/ -- Economic and business confidence among Chief Financial Officers in Europe demonstrates slight signs of improvement in Q1, but for the second straight quarter, remain behind their U.S. counterparts, found the most recent survey of CFOs conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business. Despite a small dip in confidence, U.S. executives' optimism remains stable as they expect large gains in net earnings in the next 12 months. With expectations of substantially higher oil prices for the immediate future, CFOs overall see inflation as a mounting concern but have yet to experience a widespread impact from other world events, such as the Japanese earthquake.

The quarterly "CFO Outlook Survey," which polls CFOs of public and private businesses in the U.S. and Europe (Italy and France) on their economic and business confidence found that U.S. CFOs have slightly retreated from the economic confidence they expressed at the start of the year. After completing the first quarter of 2011, the CFO Optimism Index for the U.S. economy dipped to 64.10 (from Q4's 13 quarter high of 65.50). U.S. CFO's optimism in the global economy also experienced a decline from the previous quarter (64.30 to 61.70), but remained higher than the optimism for their counterparts in Europe (58.90).

CFOs in the U.S. also continue to demonstrate a higher level of confidence in their own companies (72.00) than European CFOs (66.10).  However, U.S. and European levels of confidence appear to be slowly converging, as U.S. CFOs' confidence in their companies took a slight dip from Q4 (73.00), while European CFOs increased their confidence compared with Q4 (65.60). Over the next 12 months, CFOs across the board are expecting positive increases in several areas of their businesses, most significantly in net earnings, capital spending, technology spending and revenue.  U.S. CFOs expect a 22 percent increase in their net earnings and a 16 percent increase in capital spending, with CFOs in Europe anticipating their largest increases in those same areas (12% for net earnings and 15% for CAPEX). Interestingly, U.S. CFOs see a 10 percent increase in healthcare costs, while European CFOs only expect a substantially smaller increase of three percent in the next year.

"The theme of CFO survey responses continues to be one of caution; they are generally confident in their businesses but watchful of what's ahead," said John Elliott, Dean of the Zicklin School of Business at Baruch College. "U.S. CFOs expressed modest declines in their optimism, while European sentiment continues to grow, narrowing the spread between the two regions. Their expectations of double digit growth in net earnings and CAPEX demonstrates that CFOs across the U.S. and Europe are confident in the future of their businesses."

Both U.S. and European CFOs are focused on geographic areas closer to home for expanding their operations.  More than two-thirds of U.S. CFOs are planning to target locations in North America (72%), and more than sixty percent of European CFOs plan to expand in Central (34%) or Western Europe (33%). Relatively fewer respondents have plans for expansion into Asia (15% in the U.S. and 19% in the EU), China (14% in the U.S. and 13% in the EU) or Latin America (13% in the U.S. and 14% in the EU).

CFOs See Minimal Impact of World Events, But Concerns Loom on Inflation

As a myriad of world events have impacted millions of individuals and captured the attention of companies worldwide, CFOs in both Europe and the U.S. suggest that the financial impact of these events on their companies has not been significant thus far. When asked to rank the impact of various events on a scale of one to five (with five being the highest level of impact), the majority of CFOs in the U.S. selected three or lower when gauging the impact of debt issues, such as the European sovereign debt crisis (79%), political unrest, such as protests seen in Bahrain, Libya and Egypt (83%), labor issues, such as the union protests in Wisconsin (84%) and natural disasters, such as the earthquake, Tsunami and nuclear crisis fears in Japan (93%). Furthermore, when surveyed explicitly about the events in Japan and the impact on the operations of their companies, just over three quarters (76%) of U.S. CFOs and European CFOs (74%) felt that there was no direct impact.  For those CFOs that have experienced an impact, the areas that they were most affected were the flow of supplies, sales to Japan, availability of products and travel to and from Japan.  The sourcing of material in other markets is the most common way impacted companies are responding (51% of U.S. CFOs that have been affected and 40% percent of European CFOs that have been affected).

At the same time, CFOs across the board are becoming increasingly concerned about inflation in light of rising commodity prices. Respondents were asked to rate their concern of inflation on a scale of one to five (with five being the highest level of concern), 81 percent of U.S. CFOs selected a three or higher, and 69 percent of European CFOs selected a three or higher. Moreover, over half (57%) of U.S. CFOs and 44 percent of European CFOs stated that their level of concern has increased compared to the previous quarter (48% of European CFOs said their concern remained the same).   Both groups forecast increased rates of inflation one year from now, but U.S. CFO's forecast 3.9% while European expectations are a more modest 2.5%.

"Many of the events we've watched unfold globally and locally have been both unprecedented and devastating, but CFOs overall have not felt a strong impact on their balance sheets just yet, as it perhaps is too soon to determine their direct influence on the business community," said Marie Hollein, President and CEO of FEI. "CFOs will be closely eying macroeconomic issues like inflation and oil prices, which are being affected by these world events. Their heightened concerns, especially in the U.S., may lead to actions that will impact the consumer. If they haven't reacted already, it's certainly on their minds and it will be critical to watch what how and when companies respond in the coming months."

CFOs across the board do not see an immediate end to the high price of oil. Nearly 70 percent of U.S. respondents feel that the price of oil per barrel will be at least $140 or higher in six months, and a similar 71 percent of European CFOs expect the price of oil to remain above $140.  Surprisingly, the vast majority (69% of U.S. CFOs and 70% of European CFOs) are not actively engaged in changing behavior to accommodate oil prices, and relatively few CFOs stated they were in the process of changing their actions.  Of the portion who are taking action, CFOs in the U.S. are increasing the price of their products (66%) and adopting advanced technology (37%). European CFOs who are changing their behavior plan to do so by taking steps to become greener (63%) but also increasing their product prices (56%).

U.S. CFOs See A U.S. Economic Recovery in Sight; Sound Off on Dodd-Frank and Repatriation

U.S. CFOs this quarter largely feel that the U.S. is in the midst of, or drawing close to, a recovery. When asked when their belief in indicators such as bond yields, mortgage interest rates, U.S. unemployment rate and rising GDP will collectively improve and result in the start of a recovery in the economy, nearly half felt that the U.S. economy is already in the middle of a recovery (46%, compared with 28% of U.S. CFOs who felt this way in the same quarter last year). Another third of U.S. CFOs (32%) expect a recovery by the first half of 2012. CFOs in the U.S. also anticipate that the Federal Funds rate will remain under one percent in the next year.  While the majority (69%) support the Federal Reserve's decision to keep interest rates low, nearly a third (32%) now believe that rates should start being increased. This demonstrates moderately changing sentiments among U.S. CFOs compared with the same time last year, when less than a quarter (24%) believed that interest rates should be raised.

As the United States prepares for compliance of the Dodd-Frank Wall Street Reform and Consumer Protection Act this year, CFOs responding to the survey stated that they are not adding extra hours to prepare. Of the U.S. CFOs for which the Act is applicable, 70 percent are not allocating additional resources toward understanding Dodd-Frank. In examining the various provisions of the Act, CFOs were least in favor of the creation of the Consumer Financial Protection Bureau (CFPB) and the provisions on employee compensation disclosures, which they felt would have the strongest detriment to their companies. At the same time, CFOs in the U.S. were most supportive of the provisions that make credit rating firms liable for faulty initial ratings (23%) as well as whistleblower award programs (17%).

Eighty-five percent of relevant U.S. CFOs stated that they would support a temporary change in law that would provide an incentive for American companies to repatriate foreign earnings from their foreign operations. However, the majority (55%) feel that repatriations, should be included as part of a comprehensive corporate tax reform, as opposed to being reformed independently (35%).

U.S. CFOs More Active In, Concerned About Social Media vs. Europe

Both U.S. and European CFOs were asked about their use of social media in their professional lives and for monitoring investor and customer views of their company. The survey revealed that not all CFOs are plugged into social media: Nearly a third (32%) of U.S. CFOs and nearly half (49%) of European CFOs stated that they do not use social media, and have no immediate plans to do so. Of those using social media professionally, the most common applications are Facebook (39% of U.S. and 14% of EU CFOs) and LinkedIn (33% of U.S. and 19% of EU CFOs). A little over one quarter of U.S. CFOs use Twitter (27%), compared with only 5 percent of their European counterparts.  Interestingly, in our age of digital communication, the majority of CFOs (52% in the U.S. and 65% in the EU) stated that their company does not monitor social media for opinions about their businesses. While 53 percent of U.S. were "very" or "somewhat" concerned about stakeholder communications on social media, two thirds of European CFOs that were "not concerned" or "indifferent."

CFOs in both U.S. and Europe expect only modest changes to the strength of the U.S. Dollar when compared to the Peso, Pound, Euro and Yen. The expected changes in both groups are for a modest strengthening in the U.S. dollar in the next year.  Additional results from the survey include CFO's forecasts on their country's rate of inflation. Full survey results and historical data comparisons are available at www.financialexecutives.org or from Nicole Madison at [email protected]. The study is also available online at the Financial Executives Research Foundation bookstore and on the Baruch College home page at www.baruch.cuny.edu.

Overview of the Survey:

This quarter, the CFO Outlook Survey, conducted by Financial Executives International and Baruch College's Zicklin School of Business, interviewed 300 corporate CFOs from the United States, 96 corporate CFOs from Italy and 67 corporate CFOs from France electronically from April 5-17. CFOs from both public and private companies and from a broad range of industries, revenues and geographic areas, including some off-shore companies, are represented. The U.S. survey respondents are members of Financial Executives International; France survey respondents are members of Association Nationale Des Directeurs Financiers Et Du Controle De Gestion (DFCG) and Italy survey respondents are members of Associazione Nazionale Direttori Amministrativi E Finanziari (ANDAF). Financial Executives International has been conducting surveys gauging the country's economic outlook from the perspective of CFOs for more than 11 years.

About FEI

Financial Executives International is the leading advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers and controllers at companies from every major industry. FEI enhances member professional development through peer networking, career management services, conferences, teleconferences and publications. Members participate in the activities of 85 chapters, 74 in the U.S. and 11 in Canada. FEI is headquartered in Morristown, NJ, with additional offices in Washington, DC, and Toronto.  Visit www.financialexecutives.org for more information.

About Baruch

Baruch College is a senior college of the City University of New York. The Zicklin School of Business at Baruch College is the largest and most diverse AACSB accredited collegiate school of business in the nation. Baruch has a long tradition of producing accounting and finance graduates who become leaders as CPAs and CFOs. For more information, visit www.baruch.cuny.edu.

SOURCE Financial Executives International