CFOs began 2015 with improved optimism about the U.S. economy and their businesses, despite mounting concerns about the global economy, according to a new survey.
The quarterly survey, conducted by Financial Executives International and Baruch College's Zicklin School of Business, found that while the CFOs’ employment and wage outlook remains positive, they are fairly concerned about economic issues such as health care costs and government regulation, and see challenges to their businesses stemming from competition and the looming threat of a cyber-attack.
The CFO Outlook Survey, which polls CFOs of public and private businesses in the U.S. on their economic and business confidence and expectations, found that CFOs seem to be more confident now than in the prior year. The survey’s quarterly optimism index for the U.S. economy jumped more than five points to 70.71 (from 65.26), representing a 14 percent increase from where it stood a year ago (62.0). The optimism index for U.S. CFOs’ businesses increased to 73.11 (from 70.41 in September).
Adding to their overall business confidence, respondents on average are anticipating a sizeable growth in net earnings (13 percent) over the next 12 months.
In another encouraging sign, 80 percent of U.S. CFOs said they were not forced to reduce headcount over the past 12 months. In addition, 65 percent of respondents said that the wage levels they are paying are on the rise compared with CFOs polled the same time last year.
“Increasingly optimistic U.S. CFOs appear poised to increase wage rates,” said Linda Allen, professor of Economics and Finance for the Zicklin School of Business at Baruch College, in a statement. “U.S. businesses are relatively flush with cash and are positioning themselves to meet global challenges (such as oil price declines, China’s slowdown and cyber-security threats), as well as uncertainties in the U.S. regarding interest rate increases anticipated during 2015.”
Despite their increased confidence, CFOs revealed that they still have a number of challenges and concerns for the year ahead. The survey revealed that competition is the most shared business challenge among CFOs in the first half of 2015 (65 percent selected this as a challenge).
On average, companies experienced a nearly seven percent increase in related costs as a result of the Affordable Care Act. Half of respondents (50 percent) said they would like to see reform to the ACA in the form of full-time designation moved to 40 hours a week instead of 30. As such, when asked about their broader economic worries for their companies in 2015, respondents most commonly identified health care costs (64 percent) as a top concern, closely followed by government regulation/action (61 percent).
Respondents ranked their confidence in the ability of Congress to reform U.S. tax law at a low 1.7 (on a scale of 1 to 5), while 10 percent of respondents have even considered changing their firm's country or state of incorporation to reduce their tax obligation.
On average, CFOs anticipate the inflation rate will increase to 2.82 percent one year from now. Respondents are minimally concerned about inflation with 91 percent of respondents rating their concern at a level “three or lower” on a scale of one to five. Seventy-nine percent of CFOs said their concern has not changed since last quarter.
Eighty percent of respondents do not feel that their firm is capital constrained in terms of access to credit either from banks or from capital markets. U.S. CFOs stated they are most commonly accessing capital from banks (49 percent).
On average, respondents’ companies currently hold 17 percent of assets in cash, up from approximately 10-12 percent in years past. With regards to the capitalization or capital structure, on average, 61 percent of company balance sheets are comprised of equity and 30 percent of long term debt obligations. Twenty-eight percent of CFOs reported they are spending cautiously compared to 17 percent who are making ambitious investments in capital expenditures. More than half of those making capital expenditures are focusing on IT (59 percent).
Fifty-three percent of U.S. CFOs expect the Federal Reserve will raise interest rates in the second half of 2015. The percentage of CFOs concerned about the U.S. interest rates is low, with 82 percent of CFOs rating their concern at a level “three or lower” on a scale of one to five.
When asked about the global situations that will have a long-term impact on the economy, the decline of world oil prices was cited as being highly impactful (selected by 76 percent of respondents), second only to China’s economic slowdown (selected by 77 percent of respondents). Seventy-four percent agreed that world oil price declines will also impact the long-term economic conditions in the U.S., and their companies specifically (50 percent).
When asked about the effects of oil and gas fracturing technology, 50 percent of the CFOs surveyed said it would result in U.S. energy independence, and 45 percent said it would slow the dissemination of alternative energy technologies and energy conservation.
But few (11 percent) believed it would increase CO2 levels. Although crude oil prices recently reached a nearly six year low, 69 percent of respondents estimated that price of oil will rise again in the next six months to between $50 and $60 per barrel. Fifty-seven percent of respondents said the current OPEC policy to maintain current production levels will result in the retrenchment of fracking production levels.
Looking beyond U.S. borders, U.S. CFOs’ confidence in the global economy decreased slightly from last quarter to 53.19 (from 55.78). CFOs continue to maintain a heightened concern over the fate of the Eurozone, with more than three quarters (79 percent) rating their concern a "three or higher” on a scale of one to five. Furthermore, more than half (57 percent) of respondents do not believe a recovery of the European economy will begin until 2017 or beyond. Even though 65 percent anticipated that the European Central Bank would implement a quantitative easing program this year.
Cyber-security and Social Media
The number of major companies and organizations facing cyber-attacks in the past few years continues to escalate, with almost one quarter of respondents (21 percent) reporting they experienced a cyber-attack on their IT systems within the last six months. Nearly three quarters (73 percent) of CFOs said they are considering increasing their budgets toward improving cyber-security.
Respondents expressed mixed feelings about the role of government in combating threats to cyber-security: 46 percent believe they are a necessary component, while 54 percent believe that they are not. The percentage of CFOs who are revising their organization's cyber-security policy has increased by 39 percent since September. Additionally, there has been a 17 percent increase in the percentage of CFOs who are either upgrading security software and encryption protections, or implementing a cyber-security/IT plan—including prevention, resolution and restitution.
“The quarter’s survey shows that CFOs still have a number of concerns and business challenges, ranging from taxes to cyber-security, and that they share an uncertainty towards the government’s ability to deal unilaterally with these issues,” said Robert Kramer, vice president of government affairs at Financial Executives International. “It is encouraging to see that CFOs are becoming more proactive in meeting these challenges, as demonstrated by the expansion in their responses to cyber-attacks.”
Fifty-eight percent of U.S. CFOs said that their company currently monitors social media for opinions about the firm. Nearly half (49 percent) said they are either “somewhat concerned” or “very concerned” about how opinions expressed on social media platforms about their firm will impact business.
The survey found, however, that sentiment toward social media use is shifting, with 64 percent of respondents revealing that social media use and/or acceptance increased in 2014, compared with the prior year. Sixty five percent of CFOs said that their company currently has a social media policy in place.
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