A new survey shows that, while executives are confident about their own companies, they fear for the wider economy, writes Proinsias O'Mahony
A NEW SURVEY of chief financial officers (CFOs) of US companies shows that optimism in the US economy has plummeted towards an all-time low.
"We continue to see that CFOs are increasingly anxious about the business ramifications of the current US economic downturn," said John Elliott, dean of the Zicklin School of Business at Baruch College, who conducted the study in conjunction with Financial Executives International.
The state of the US economy was the biggest worry for executives, with 48 per cent citing it as a major concern. Slowing consumer demand and rising inflation also occupied the minds of CFOs.
So, too, did the cost of oil, the second most pressing issue for respondents, with 35 per cent anxious over the price direction - at least before the pullback of recent days. At least half expect the price of oil to hit $160 or higher in the next six months. Most had already actively responded to the oil spike, with executives tending to increase prices for their products or services, cut back on corporate travel and/or adapt greener practices in general.
CFOs were optimistic in relation to the state of their own companies, however, with more than two-thirds upbeat regarding company prospects. "While economic worries remain, the steadiness in CFOs' outlook toward their own companies may reveal that they are adapting to the turmoil and taking appropriate actions within their organisations," Prof Elliott suggested.
A sceptic might suggest that it reflects basic human over-confidence, an "it won't happen to me" reaction. James Montier, equity strategist with Société Générale and author of two books on behavioural finance, has written in the past about this recurring disconnect, noting that CFO surveys constantly reveal "that managers are always more optimistic about the outlook for their firm than they are the economy as a whole", a "classic case of illusion of control driving over-confidence".
However, if respondents were overly confident towards their own company prospects, they may very well have been too pessimistic in relation to the price of oil. When asked for their predictions, oil was ranging between $136 and $145. A dramatic correction subsequently ensued, with oil falling below $115 yesterday. For commodities in general, July turned out to be the worst month since March 1980.
This latest survey is not the first to record CFO concerns. Prof John Graham, director of a separate and widely followed CFO survey, noted last November that CFO optimism was "spiralling downward", a trend that has continued in the meantime.
In June, Graham's survey found that more than half of CFOs did not expect the US economy to rebound until the second half of 2009 or later and that 64 per cent of European CFOs had grown more pessimistic about the economies of their own countries, with just 8 per cent becoming more optimistic. That same survey found that CFO optimism in Asia had also hit new lows.
CFOs are not the only corporate pessimists. Just last week, Chief Executive magazine's CEO Confidence Index continued its downward trend, reaching its lowest level in six years.
In Britain, too, economic pessimism is growing. The latest Citywire Rated Manager Survey revealed that more than three-quarters of respondents said they expect the current housing correction to be longer and more severe than the downturn of the early 1990s.
Opinion remains divided, however, as to whether America is actually in recession. A recent poll of economists revealed an almost 50:50 split on the issue.
The Bush administration had hoped that the $152 billion tax rebates package granted this summer would help avoid such an occurrence, with Treasury Secretary Henry Paulson predicting that the rebates would create half a million jobs this year. Consumer surveys suggested that most planned on saving rather than spending the money, however.
Writing in the Wall Street Journal last week, Matthew Shapiro and Joel Slemrod of the University of Michigan confirmed that analysis of the data so far suggests that the rebates "may not yet have provided much of a boost to consumption" and are "likely to be less effective in stimulating the economy than policymakers had hoped".
That's not likely to cheer CFOs. Nor are the latest opinion polls suggesting that Barack Obama is likely to beat Republican rival John McCain to the White House. When asked which presidential candidate would be most beneficial to their company, just 13 per cent plumped for the Democratic hopeful.
