CFOs Optimistic About US Economy

Overall, nearly seven out of 10 CFOs are more optimistic this quarter, with a miniscule 7% reporting less optimism, compared to almost half (45%) that were less optimistic about the economy last quarter (See  CFOs Project 12-month Employee Totals to Increase ). Further, half of the CFOs are cheerful about their own company prospects, compared to 37% last quarter, according to the latest release of the Financial Executives International (FEI) and Duke University Fuqua School of Business CFO Outlook Survey.

CFOs seem especially pleased with the outlook in corporate earnings, anticipating an increase on average of 13.5% over the next 12 months. Sales revenues are expected to increase for 79% of firms, with an average increase in revenues of 6.3%, both numbers up from last quarter .

The CFOs say their favorable outlook is driven in part by the value of the US dollar, with one in five expecting sales will be higher in the second half of 2003 due to the dollar’s depreciation. Further, the overall sense of good will about the economy shows up in higher expectations about the gross domestic product (GDP).  Last quarter, CFOs expected the GDP to increase by 1.7%, while this quarter GDP is expected to grow by 2.2% over the coming year.

Still Cautious

However, the US dollar depreciation is having a less positive impact on capital spending and hiring than it is on sales. CFOs report that capital spending will increase by only 1.5% during the next 12 months.  Further, two-thirds of companies say that they are spending at depressed levels, if at all, with over half (55%) reporting cautious spending and 13% holding off altogether.  Conversely, 26% are spending at a normal level, and only 6% are spending aggressively.

Among those that are spending cautiously or holding off altogether, only 8% say that capital expenditures will return to normal during the next six months and 25% say during the first half of 2004. Technology spending will remain slow for the next twelve months, with an average increase of only 2.1%.  Advertising spending will be flat.

Employment plans are also virtually flat and on average, CFOs forecast a decline in employment by 0.4%.   Overall though, 43% of companies expect to increase their number of employees, in contrast to 32% that will reduce employment.

Legislatively Speaking

The recent reduction in capital gains and dividend tax rates is expected to reduce the cost of equity capital at 22% of the companies surveyed, with 14% saying their cost of equity will drop a little and 8% saying the reduction will be large.  Additionally, the reduction in dividend tax rates could also lead to increased dividend payments.  Among companies in the survey that currently pay dividends, 28% say they probably will increase dividends and 2% say they definitely will.   On the other hand, among survey companies that do not currently pay dividends, 13% say that they probably will initiate dividends in response to reduced dividend taxation, though none say their plans are definite. 

The new bonus depreciation provisionthat allows a 50% deduction of the adjusted basis of qualified propertyplaced in service before January 1, 2005 is another legislative change that is expected to contribute to an increase in capitalspending at one-quarter of companies.   CFOs expect the new provision to lead to a small increase in spending at 15% of companies, a moderate increase at 10% of companies, and alarge increase at 1%.