CFOs Increasingly Upbeat on Economy

In the wake of last week's news that U.S. GDP expanded for the second quarter in a row during the fourth quarter, a survey of CFOs provides more evidence that the economy is beginning to mend.

CFOs' optimism about the economy rose to 56.98 in the fourth quarter, up from 54.2 in the third quarter and 41.9 in the second quarter, according to a quarterly survey conducted by Financial Executives International and Baruch College. The almost 400 CFOs surveyed were even more upbeat about the outlook for their own companies, with that reading rising to 67.09, up from 64.1 in the third quarter and 51.44 in the second quarter.

John Elliott, dean of the Zicklin School of Business at Baruch, says the best news can be found in the report's details. "At the end of the third quarter, we saw an improvement in sentiment, but that improvement wasn't really supported by specific forward-looking expectations," Elliott says. "This quarter, we saw a continuation of the uptick in optimism, but it was supported by increased optimism about capital spending and hiring."

CFOs are projecting an 8.89% increase in their companies' capital spending over the next 12 months, up from the 1.1% gain they were predicting in the third quarter, and say hiring will be up 2.92% this year, vs. the 1.7% rise expected in the third quarter.

Elliott also notes a "significant turnaround" in the inventory situation, with CFOs now expecting to increase inventories by 2.8% over the next 12 months, vs. the 1.9% decline in inventories they projected in the third quarter and the 3.08% decrease cited in the second quarter. The 5.9% surge in fourth-quarter GDP was driven largely by a decline in inventory liquidation.

The finance chiefs' outlook on revenues and net earnings also showed considerable improvement. CFOs are projecting revenues will rise 9.62% over the next 12 months, up from the 5.8% gain they were forecasting in the third quarter. And they expect net earnings to skyrocket 22.07%, vs. the 10.9% jump they were forecasting in the third quarter.

Amid the rampant optimism, the finance chiefs surveyed are still hesitant to declare an end to the recession. Just 9.2% now say a recovery will start in the first half of 2010, down from 27.6% who were calling for a first-half recovery back in the third quarter. Almost half (49.2%) expect the recovery to kick off in the second half of this year, and 21.9% say it will start in the first half of 2011.

"It's a little slower recovery than previously expected," says FEI President Marie Hollein. "While things are looking better, they're still proceeding with caution."

CFOs have good reason to be cautious, given the 10% unemployment rate and the fact that the federal stimulus program will end in coming months, Elliott says. "There are realistic awarenesses that there are still things that could go wrong."

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