Slouching Toward Recovery

CFOs see several positive economic signs, but employment isn't one of them.

At last, some good news. For the first time in more than a year, finance chiefs expect double-digit growth in earnings and significant growth in capital spending over the next 12 months, according to this quarter's Duke University/CFO Magazine Global Business Outlook Survey. Finance executives also plan to loosen the reins on spending for technology, research-and-development, and marketing and advertising.

This welcome news comes with a few caveats, however. The 15% expected growth in earnings and 9% growth in capital expenditures start from low bases after a dismal couple of years. And employment will continue to be a drag on the recovery, with CFOs saying they expect to expand their full-time domestic workforces by less than 1% over the next 12 months. Temporary hiring will also increase by less than 1%, but outsourced hiring will grow by 4%, indicating that companies are reluctant to commit to full-time workers amid ongoing uncertainty. More than half of finance executives say they don't expect their companies to return to pre-recession staffing levels before 2012.

Nonetheless, nearly half of CFOs are more optimistic than they were last quarter, while 14% are less so and 39% say their optimism levels are unchanged. "What I think has changed is that for the 80% of the population that is fully employed, there's less worry that they're going to lose their jobs," says Mark White, CFO at enterprise-software giant SAP America. "They have a lot more confidence than they did a year ago." White says increased spending by this group should trickle through the economy during the first half of the year.

Lingering Doubts
White hesitates to claim a recovery, however. "What worries me is that there is still no hiring and there are a lot of people who are still underemployed," he says. "Until that's fixed, the economy doesn't really come back."

Gayle Anderson, CFO of online dating site, a division of IAC, shares White's concern, even though her company's business held up well through the recession. "If this is truly a jobless recovery, the longer people are out of work the more they will start cutting back on anything that is not a staple," she says.

White worries about the many regulatory uncertainties on the national agenda as well. "Until we know where we're going on health care, free trade, clean energy, mortgage relief, unemployment benefits…all of that is so up in the air, it freezes people and prevents them from making investment decisions," he says. "I think CFOs are saying, 'Where are we going? Do we have enough confidence to start this project?' And they're waiting. I know I'm waiting."

Tight credit also poses an obstacle to a robust recovery and has caused many companies to postpone or cancel expansion plans or new projects. Seventy percent of finance chiefs at small and midsize businesses report that credit conditions are worse or much worse compared with the summer of 2008, prior to the collapse of Lehman Brothers. Even among companies with more than $10 billion in revenue, 40% say borrowing is more difficult now. Analyzing companies by credit rating reveals that while 87% of companies rated B or lower are finding borrowing more difficult than they did before the crisis, 50% of the highest-rated companies are, too.

Nearly half of CFOs are planning to reduce their inventory during the first half of 2010, in part due to supply-chain improvements that allow them to hold less product, but also because of reduced demand.

Global Differences
While the U.S. economy appears to have hit bottom and begun to improve, albeit slowly, Europe's CFOs continue to face serious challenges. As the region struggles with Greece's debt crisis, European firms will continue to make layoffs over the next 12 months, according to finance chiefs, although at a slower rate. Earnings will grow slightly, but firms are not yet ready to spend. Most spending categories remain flat, with marketing and advertising spending expected to decline slightly.

In Asia and China, however, finance executives are notably more optimistic than their European and U.S. counterparts. CFOs in the region expect strong growth in earnings over the next year: capital spending will soar by 16% in Asia. Finance chiefs also plan to spend in other areas, including technology, R&D, and marketing and advertising. In a key difference from the United States and Europe, CFOs in Asia and China say they will be hiring and raising salaries significantly.

In the United States, while lingering unemployment and credit-market concerns pose obstacles to a robust recovery, positive trends in many key spending categories are a big change from even three months ago, when CFOs were predicting more layoffs and very limited spending on everything from capital equipment to technology. Says's Anderson, "I'm encouraged by the fact that things are at least not getting worse."

Kate O'Sullivan, CFO Magazine

Kate O'Sullivan is senior editor for strategy at CFO.