U.S. CFOs’ confidence in the U.S. economy increased more than 10 percent in the first quarter of the year, reaching a two-year high, according to a new survey by Financial Executives International and Baruch College’s Zicklin School of Business.
The quarterly FEI/Baruch CFO Outlook survey found that U.S. CFOs remain concerned about health care costs, the global economy and the future of the Eurozone. Revenue growth, competition and regulatory issues rank among their top business challenges.
CFOs are considerably more confident now than they were toward the end of 2013. U.S. CFOs’ optimism about the U.S. economy saw the biggest improvement, reflected by 10 percent growth in the quarterly optimism index, rising nearly 6 percentage points to 62.0 from 56.2 in the previous quarter.
The index for U.S. CFOs toward their own businesses increased 2 points to 67.7 from 65.1 in the previous quarter. Respondents anticipate a 17 percent increase in net earnings over the next 12 months, offset by the 11 percent increase they expect in health care costs.
CFOs also expect a 10 percent increase in both technology spending and revenue. Businesses are making plans for more capital investment, anticipating an 8 percent increase in capital spending compared to their projections for a 2 percent increase in the previous quarter. However, revenue growth topped CFOs’ list of business challenges for 2014 (38 percent selected this as their first choice), followed by competition (19 percent) and regulatory issues (15 percent).
Among their broader economic worries, nearly one-third of CFOs (32 percent) rated government regulation as their first choice concern and close to a quarter (23 percent) saw health care costs as a top concern.
In the past six months, companies experienced, on average, a 7 percent increase in related costs as a result of the Patient Protection and Affordable Care Act. A 60 percent majority of CFOs anticipate that the new health care regulations will affect their company’s insurance coverage, mainly through an increase in employee co-pays.
By and large, CFOs did not indicate they have been heavily affected by President Obama’s executive order on the U.S. minimum wage. When asked about their potential actions should Congress raise the minimum wage to $10.10 per hour, a two-thirds majority of respondents (67 percent) said it would not affect their hiring decisions appreciably. Nineteen percent said they would hire fewer employees, while 16 percent said they would look for new ways to outsource low-skill jobs.
When asked which of the President’s State of the Union proposals Congress should pass in 2014, the majority of CFOs (72 percent) favored a tax reform that lowers rates for U.S. corporations, but closes loopholes, especially for those using off-shore tax havens. Action by Congress to pass legislation that protects companies and inventors against patent trolls was also recommended by 60 percent of respondents.
Looking beyond domestic conditions, U.S. CFOs’ confidence in the global economy remains steady, raising the index less than half a point to 54.6 (from 54.3 in the previous quarter).
However, with increasing turmoil in several European countries in the past month, especially Ukraine, CFOs sustained their concern over the future of the Eurozone. When asked to rate their concern on a scale of one (not concerned) to five (very concerned), this quarter more than half of all U.S. CFOs (70 percent) selected a “three or higher.” In addition, over a quarter (27 percent) of respondents do not anticipate a recovery of the European economy will begin before 2015.
Twenty-eight percent of CFOs believe northern Europe is in the midst of a recovery, but southern Europe is not, compared with only 15 percent who believe the entire Eurozone is already in the midst of a recovery.
“Optimism regarding the U.S. economy is the highest our survey has seen in two years, and despite some challenges, CFOs have a positive outlook for their growth opportunities for 2014,” said Linda Allen, professor of economics and finance at Baruch’s Zicklin School of Business. “In contrast to the dramatic increase in optimism regarding the U.S. economy, however, CFOs’ outlook for the global economy is relatively stagnant, reflecting economic uncertainty and political unrest in many regions abroad. CFO sentiment towards the economic recovery of the Eurozone in particular has been slow to pick up, but has been gradually gaining traction over the past two years.”
The survey also polled CFOs on their hiring plans, the President’s State of the Union proposals, inflation, interest rates and the threat of cyber-attacks.
CFOs remain optimistic about the outlook for the workforce. On average, respondents expect the U.S. unemployment rate will remain steady, continuing to average around 6.6 percent one year from now. More than half (55 percent) believe that wage levels are on the rise and a comparable percentage (59 percent) are planning to hire additional employees at their company during the first half of 2014.
As in previous quarters, respondents are most commonly seeking experienced consultants, entry-level college graduates and skilled technical workers for their workforce.
The majority of U.S. CFOs (78 percent) are currently taking steps to retain their talent, mainly through training and development (61 percent), compensation (59 percent) and team building (55 percent).
“U.S. CFOs’ outlook and concerns about employment has always been a central part of our polling, and the trends in this quarter’s results are indicative of the progress in broader U.S. economic growth,” said FEI president and CEO Marie N. Hollein. “While the unemployment rate has eased, and CFOs continue to report on plans to hire and retain talent, more U.S. CFOs see healthcare costs as one of their top business concerns. Given CFOs’ expectations of continued increases in health care costs, we continue to believe this will be one of the closely watched areas for American businesses.”
Among the other findings from the survey, one year from now, the majority of CFOs anticipate the inflation rate will increase to 2.57. Respondents remain only moderately concerned about inflation, with 46 percent of respondents rating their concern at a level “three or higher” on a scale of one to five. Over a third (38 percent) think that tapering will increase inflation, while 55 percent believe inflation will not change as a result of tapering. Only 8 percent of respondents believed the result would be lower inflation.
Nearly all of the U.S. CFOs surveyed expect interest rates to be higher over the next year. On average, respondents to the survey expect interest rates to increase by less than one percent (0.76 percent) over the next six months, and increase by 1.36 percent one year from now.
The percentage of CFOs concerned about interest rates increased slightly from last quarter, with 31 percent rating their concern at four through five on a scale of one to five, compared with 28 percent of CFOs rating their concern at these levels in the previous quarter.
U.S. CFOs stated they are most commonly accessing capital from banks (54 percent). On average, respondents’ companies currently hold 12 percent of assets in cash. With regards to the capitalization or capital structure, on average, 54 percent of company balance sheets are comprised of equity and 29 percent of long-term debt obligations.
Forty-two percent of CFOs reported they are spending cautiously compared to 31 percent who are making ambitious investments in capital expenditures. More than two thirds of those making capital expenditures are focusing on technology (71 percent).
Three-quarters of the CFOs polled revealed they are currently taking steps to protect against cyber-attacks, most notably upgrading security software and/or encryption protections (71 percent) and establishing off-site backup systems/plans (67 percent).
Given the increased number of major companies and organizations that have faced cyber-attacks, 67 percent of CFOs are considering increasing their budgets toward improving cyber security. Nearly one-fifth of respondents (19 percent) reported experiencing a cyber-attack in the last year.
Approximately half of those attacks (48 percent) came from foreign sources. However, the majority of the incidents (61 percent) were categorized as “not at all severe” or “moderately severe” and only 4 percent involved a data breach. Furthermore, none of the attacks reported by respondents lasted for more than several hours or several days.