Chief Financial Officers' Pessimism About U.S. Economy Grows

Posted 11:10 a.m. Jun 8, 2006 — Updated 11:10 a.m. Jun 8, 2006

DURHAM, N.C. — Capital spending and hiring will continue to increase this year, according to a

survey of chief financial officers

by Duke University and CFO Magazine. However, pessimism among CFOs is growing due to concerns about inflation and the price of oil.

"CFOs are telling us that we are moving closer to the danger zone for the U.S. economy, but that their firms can ride it out for now," said John Graham, a finance professor at Duke's Fuqua School of Business and director of the survey, in a statement. "There are several risk factors that are near the tipping point, and if any of them worsens, it would heighten the risk of a corporate slowdown."

Optimism plummeted among CFOs in the June survey, with only 24 percent saying they were "more optimistic" than the last quarter. That's down from 49 percent in the previous quarterly survey.

Also, the percentage of those who are less optimistic jumped to 46 percent from 28 percent the previous quarter.

Other key findings included:

Nearly half, or 49 percent, of CFOs are more optimistic about their own companies. Analysts said that indicates that many companies have thus far escaped pressures on the economy, such as increasing interest rates and energy costs.

Major concerns are rising wages, falling consumer demand, and increased fuel costs. This was the first time in 41 quarterly surveys that rising wages was considered the No. 1 concern for CFOs.

If core inflation hits 3.5 percent, if Federal Funds rate climbs above 5.5 percent, or if oil surges past $75 a barrel, CFOs said their companies' bottom line will suffer.

"The risk posed by rising health care costs has not gone away, but companies now have bigger worries," said Don Durfee, research editor at CFO magazine. "Rising wages and salaries are a problem because CFOs tell us that they can only pass along about 40 percent of increases in employment costs. Similarly, on average only about half of rising commodity prices show up in the final prices of the products that their companies sell. The companies have to eat the rest."

On the positive side, CFOs plan to increase capital spending by 7.5 percent. That's up from 6.5 percent the previous quarter.

Also, earnings are expected to increase 10.4 percent over the next year.

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