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CFOs' Optimism Declines, Study Finds

Corporate financial chiefs express concern over the continuing surge in the cost of healthcare and energy.

June 03, 2005|From Reuters

Optimism among U.S. chief financial officers tumbled to a three-year low this quarter as executives struggled with high fuel and labor costs, rising interest rates and pricing pressures, according to a business outlook survey released Thursday.

In the survey, 40% of company financial chiefs were more optimistic about the economy than they were in the previous quarter, down from 46% last quarter and 70% a year ago, the survey of 365 U.S. chief financial officers by Duke University and CFO Magazine showed.

"In a situation like this, where the optimists barely outweigh the pessimists, we can expect to see sluggish economic growth," said John Graham, professor of finance at Duke's Fuqua School of Business.

The survey, which also polled hundreds of Asian and European corporate finance chiefs, showed Asian CFOs were as cautious as U.S. CFOs, while almost a majority of European financial chiefs were explicitly pessimistic.

American CFOs were most concerned about the cost of healthcare. They expected those costs to rise 9% in the coming year, on average, the survey showed. They also were concerned about high fuel prices, particularly in the face of limited pricing power.

CFOs also were nervous about the effects on the economy if the Federal Reserve continued to raise its key short-term interest rate, now 3%.

"Right now, the CFOs say we're kind of at a tipping point, where further increases in interest rates would start to put a drag on the economy," Graham said.

Of CFOs surveyed, 83.2% said a Fed rate of 4% would slow U.S. economic growth overall, but far fewer -- 43% -- said it would slow growth at their own firms.

As rising interest rates contribute to higher costs, many CFOs said they would reduce their capital spending plans.

Two-thirds of the CFOs polled still plan to increase capital spending in the near term, but they have lower expectations for what they can spend. CFOs, on average, expected to increase capital spending 4.5% in the next quarter, below the 5.4% increase they expected last quarter.

As for their own product and service prices, CFOs forecast that they would be able to raise prices 2.1% in the next 12 months, up from the 2% they forecast last quarter.

The majority said rising prices for energy and raw materials in general were the main reason that they would need to raise prices, and 12% cited labor costs.

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