Chief financial officers surveyed recently expect employment and capital spending to slow over the next year, due to inflationary pressures on input costs, such as high fuel and health care costs, increased costs of short-term borrowing, and a lack of pricing power.

Marking a new low for CFO optimism, this quarter, 40 percent of U.S. CFOs are more optimistic about the economy than they were last quarter, while 26 percent are less optimistic, according to the June 2005 Duke University/CFO Magazine Business Outlook survey of 365 U.S. CFOs. Last quarter, 46 percent of CFOs were more optimistic, while 54 percent were more optimistic two quarters ago, and more than 70 percent were more optimistic a year ago, according to survey results.

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, with nearly 40 percent of U.S. CFOs citing high health care costs as a top issue. CFOs expect health care costs to increase by almost 9 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.

Respondents also say that additional interest rate increases will slow U.S. economic growth. Among the CFOs surveyed, 83.2 percent say a Federal Funds rate of 4 percent will slow U.S. economic growth. The CFOs are somewhat more optimistic about prospects for their own firms, but 43 percent still say that increased interest rates will slow growth at their own firms.

Corporate executives are also reducing capital spending plans, in part due to higher interest rates, according to the survey. While two-thirds say that they will increase capital spending in the next 12 months, the increase will average only 4.5 percent, down from 5.4 percent last quarter.

Price increases at U.S. firms are expected to average 2.1 percent next year, up slightly from the 1.95 percent price increase anticipated last quarter. In part, this low level of price inflation reflects an inability to make price increases stick due to a highly competitive economy, according to the report. At the same time, input costs are increasing, putting the squeeze on corporate profits. In addition to rising health care costs, 53 percent of U.S. CFOs say that rising energy and raw materials costs are the main reason that companies feel the need to increase prices, while 18 percent say labor costs are leading to higher input costs.

Domestic employment is expected to increase by 1.4 percent this year, down from plans expressed last quarter to increase employment by 1.7 percent. Forty-three percent of companies say that they will increase employment by a small amount in the third quarter of 2005, 16 percent by a moderate amount and only 2 percent by a large amount. Employment growth will slow moderately in the fourth quarter of 2005. While domestic employment growth is slowing, outsourcing plans are again increasing. The number of outsourced employees is expected to rise by 6.5 percent during the next 12 months, up from expected growth of 2.7 percent in last quarter's survey.

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