Duke University reports CFO Survey: Optimism Tumbles, Employment Picture Bleak

Optimism about the U.S. economy has fallen back to recession levels among chief financial officers (CFOs), who foresee minimal increases in expected hiring, weak consumer demand and heightened economic uncertainty.

Credit is still tight for small firms and many firms continue to hoard cash. Without improvement in the economy, CFOs say earnings growth and capital spending will falter within six to 12 months.

These are some of the findings of the most recent Duke University/CFO Magazine Global Business Outlook Survey. The survey, which concluded Sept. 10, asked 937 CFOs from a broad range of global public and private companies about their expectations for the economy. (See end of release for survey methodology.) The research has been conducted for 58 consecutive quarters. Presented results are for U.S. firms unless otherwise noted.


— CFO optimism about the U.S. economy has fallen to 49 on a zero-to-100 scale, well below the rating of 58 from the last quarter. Pessimists outnumber optimists four-to-one. European CFOs’ optimism rate is 58; Asian CFOs’ rate is 70.

— Half of CFOs say they will cling tightly to cash due to economic uncertainty and as a liquidity buffer. The other half will spend some cash reserves in the next year, primarily for investment, to pay down debt and to make acquisitions.

— Earnings are expected to rise 12 percent and capital spending almost 7 percent in the next 12 months. However, nearly half of CFOs say unless the overall economy improves, there is only a six-month window during which they can maintain this level of growth.


Optimism about the overall economy fell at 53 percent of U.S. firms and increased at only 14 percent. The optimism rate of 49 is at a level not seen since the first quarter of 2009, when CFOs rated the economy at 40.

“The CFO optimism index has proven to be an accurate predictor of future economic performance,” said Julia Homer, executive vice president for content at CFO Publishing LLC. “Therefore, this dramatic drop in optimism bodes poorly for the economic outlook. Half of CFOs say there is only a six-month window — and another one-fourth believe it’s a 12-month window — during which they can maintain current levels of business activity without improvement in the overall economy.”


U.S. companies expect full-time domestic employment to inch up by 0.7 percent over the next year, while temporary employment will increase 0.8 percent. The labor picture is about the same in Europe, but much stronger in Asia (with expected growth of more than 5 percent).

“This rate of U.S. employment growth will increase payrolls, but not put a dent in the unemployment rate due to growth in labor force participation,” Homer said. “Another negative employment trend is the recent surge in hiring contract and temporary employees rather than permanent workers.”

U.S. CFOs say nearly one-fourth of recent hiring has been targeted at contract and part-time employees, up from 17 percent prior to the recession.


“There has been no progress in fixing the credit problem over the last year,” said Campbell R. Harvey, a professor of finance at Duke’s Fuqua School of Business and founding director of the survey. “Indeed, half of the small businesses say credit conditions are worse than in 2009.

“The math is simple. A) Banks are sitting on cash because of their poor health and general uncertainty. B) Small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C) In usual circumstances, small and medium-sized businesses account for the majority of employment growth. A+B+C implies we are stuck at 9 or 10 percent unemployment,” Harvey said.


“Cash exists in two locations: bank reserves and balance sheets of healthy companies,” Harvey said. “Banks show no sign of unfreezing credit. They are lending to the government, not to businesses. However, U.S. firms are sitting on over $1.8 trillion in cash. When will it be unleashed?”

The survey results show 50 percent of respondents have no intention of deploying their cash over the next 12 months. More than half of responders say they will continue to sit on cash for liquidity to protect against another round of credit tightening and general economic uncertainty. Of the 50 percent that will deploy cash, only 56 percent will allocate to capital spending and investment.

“We were especially interested in the type of capital spending that creates jobs,” Harvey said. “The survey shows only 22 percent of firms say their new capital spending will lead to hiring. This bodes very poorly for employment in 2011.”

The above clip, while lengthy, is a partial list. There is much more in the survey including reports on Europe and Asia. Inquiring minds will want to give the survey results a closer look.

Cash is a Mirage

As for “unleashing cash” … It’s not really there in the first place. That cash is debt. I talked about the myth of corporate cash on two occasions recently.

August 12, 2010: Are Corporations Sitting on Piles of Cash?

Here was my answer.

So, in spite of what most are saying, corporations are not really holding tons of cash, ready at any moment to go on an investment or hiring spree.

Instead, corporations burnt by inability to raise cash during the 2008 credit bust are simply taking advantage of market conditions to raise cash levels now, at attractive rates, while they can.

Corporations raise cash in two instances

1. When they can
2. When they have to

After the corporate bond blowup in 2008, companies are wisely focusing on #1, while they still can. How much longer the market is willing to allow debt financing at favorable rates remains to be seen. When it stops, equities are likely to get clobbered.

Hiding Debt

August 20, 2010: Lease Accounting and the Corporate “Cash Mirage” – How Corporations Hide Debt

Raising Cash While They Still Can

Putting two-and-two together I cannot help but wonder if some of this recent corporate “cash raising” exercise is directly related to the proposed new accounting rules. Certainly rule #1 above applies, and for some corporations the window might close in a year.

Thus, it is highly likely some corporations are “raising cash” now, just to be safe, while they still can. That is one plausible explanation for at least a part of the massive corporate debt issuance as of late.

On the other hand, since when has there been any meaningful changes in accounting rules that were not discarded, ignored, or put on the back-burner for years or decades?

Regardless, we have yet another solid reason for stating that “high” corporate cash levels are nothing but a mirage.

Liquidity, Not Expansion

From the CFO report: More than half of responders say they will continue to sit on cash for liquidity to protect against another round of credit tightening and general economic uncertainty. Of the 50 percent that will deploy cash, only 56 percent will allocate to capital spending and investment.

Liquidity, not expansion plans is the reason for 50% of that cash. Only 28% is for capital spending and investment. Some of the rest is for share buybacks at stupid levels (undoubtedly while insiders dump their shares).

By the way, borrowing money to hold cash for liquidity purposes, with no intention of using it is a drain on earnings, although arguably not much since borrowing rates are low. Think of it as an insurance policy.

Of the 28% allocated for capital spending and investment, note that 75% of CFOs think the window to deploy that cash is 6-12 months max, a period “during which they can maintain current levels of business activity without improvement in the overall economy.”

Good luck with that. Yet, the sideline cash myth permeates the airwaves.

Mike “Mish” Shedlock
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