CFOs' views on the U.S. economy deteriorated a bit in the second quarter, even though their outlook is still far rosier than it was a year ago. The quarterly survey of CFOs conducted by Financial Executives International and Baruch College's Zicklin School of Business shows the CFO optimism index fell to 48.14 in the second quarter from 53.60 in the first quarter, while CFOs' outlook for their own companies declined to 67.40 from 69.49.
Recent events are probably to blame for the deterioration in sentiment, says John Elliott, Dean of Baruch College's Zicklin School of Business. "We saw the oil spill. We saw the European fiscal crisis. We've seen concerns over the sustainability of Asian growth rates," Elliott says. "You look at every one of those factors and they just add uncertainty." The enactment of both healthcare reform and financial regulatory reform have compounded that uncertainty, he says.
The decline in the economic optimism index breaks a string of four consecutive increases. But the 48.14 reading in the second quarter is still far higher than the 41.90 reading in the second quarter of 2009, and other information in the survey also confirms how far the economy has already come.
"When you go into the details about technology spending, capital spending, revenue growth, earnings growth--those are all significantly above where they were a year ago," Elliott points out. For example, CFOs expect their companies' tech spending to rise 6.8% over the next 12 months, down from the 10.3% growth they forecast in the first quarter, but well above the 1.95% increase they cited in the second quarter of 2009.
There has been considerable coverage recently about the amount of corporate debt that will mature over the next few years. The 279 CFOs who responded to the FEI/Baruch survey say that 20.5% of their outstanding long-term debt comes due in 2011 and another 17.4% will mature in 2012.
Elliott says the statistics on maturing debt were not as bad as he had expected. "My sense is that a number of companies anxious about this debt maturing and the rush into the capital markets have been refinancing and extending things all year," he says. "I think the problem is less severe than it was six months to a year ago."
Fifty-nine percent of the executives say they plan to pay off the maturing debt with cash generated by the business, while 26% plan to sell new debt and 5% say they will issue new equity.
If companies do have to refinance, the credit markets seem to be in much better condition. Twenty-one percent of the CFOs expect easier access to credit over the next six months, while 62% expect no change in their access to credit. "The markets have opened up a bit," says Marie Hollein, president and CEO of FEI.
In the wake of healthcare reform, the CFOs are predicting their healthcare costs will rise 10% over the next 12 months. That's down from the 12.23% increase they projected during the first quarter. The survey also shows companies are plotting their responses to healthcare reform and the changes it will bring, with 66% planning to increase what employees pay for health coverage, while 34% plan to make cuts in the company's health benefits.
"It looks like companies are going to respond to this healthcare legislation, but also that they don't expect it to be as dire as some of us had expected six months ago," Elliott says.
Of course, since then the Dodd-Frank Act added another item to CFOs' list of concerns. Forty-five percent of CFOs surveyed expect financial regulatory reform to boost their banking costs, while 39% say it is likely to boost compliance requirements and costs. And 53% expect to see their taxes increase in the next 12 to 18 months.
For more about the outlook for the U.S. economy, see Keeping Expectations Real.