Surprise, surprise: optimism remained strong among CFOs at the close of 2013, Deloitte officials said, citing a recent analysis.
In fact, it’s the first time North American CFOs expressed such a high level of optimism and confidence for entire calendar year, said Greg Dickinson, the director of Deloitte LP’s North American CFO Signals survey.
“It’s unprecedented,” Dickinson said, adding that 54 percent of CFOs expressed improved optimism about the prospects of their organizations.
In contrast, just 21 percent expressed declining optimism.
The survey tracks the thinking and actions of about 100 CFOs from North American companies averaging more than $7 billion in annual revenue.
The thumbs-up optimism through year’s end is the reverse of what has traditionally unfolded over the course of the survey’s history, which dates back to the second quarter of 2010.
“Usually, we go through this pattern where there’s some optimism at the beginning of the year, when new plans are kicking in and projects are starting up,” Dickinson told Leo Rommel of Industry Today.
“Then, usually somewhere in the second or third quarter, there is a pretty big dip and we go negative,” he said. “That’s because either there were some external disruptions or because the optimism that they had at the start of the year has waned and been overtaken by the stark realities that have emerged over the course of the year.”
For once, that didn’t happen this year, according to this latest survey, administered in November.
“The good news is that there is a pretty optimistic sense among the CFOs of very large North American companies,” Dickinson said. “And this is the first time that we’ve seen net optimism ratings stay positive for all four quarters of a calendar year.”
But while optimism continues to be high about the things CFOs can control and use to drive growth in their companies, their confidence has hit rock bottom in terms of external metrics.
“It seems a bit contradictory, but there’s a reason behind it,” he said. ‘The way we’re internalizing that is that companies are still pretty optimistic about their own ability to grow, but underlying that, there’s still a lot worry about where that growth is going to come from.”
And according to Dickinson, that is where concern remains treacherously high.
DREARY SALES FORECAST
There are two parts to evaluating how CFOs are feeling, and why, Dickinson said.
“When we asked them, in the survey, ‘Are you more or less optimistic?’ they were offered two choices as to why they replied how they did,” Dickinson said.
One, he said, was: “I’m more or less optimistic because of what is happening throughout the general business environment.”
The other choice, according to Dickinson, was: “I’m more or less optimistic because of what is happening within my own company and industry.’”
The survey shows that CFOs were far more optimistic for the latter reason as opposed to the former.
In essence, their sustained optimism is driven overwhelmingly by confidence in their own organization’s operations and not by confidence in the broader business environment, Dickinson said.
“The optimism is much more about the company’s ability to continue to make changes and adapt,” Dickinson said. “When you look at what has bolstered optimism, it’s not so much perceptions of the external business environment but perceptions of a company’s ability to deal with what they’ve got.”
Consequently, CFOs’ year-over-year sales projections hit an all-time survey low of 4.1 percent, 0.9 percent drop from the 5.0 percent reported in the previous quarter’s report.
That means while CFOs indicate their organizations remain focused on growth, signs have appeared that show rising conservatism and defensiveness.
To a greater extent than at any point in the last year, organizations are indicating a focus on risk, business rationalization, and cost reduction.
As a result, hiring expectations remained depressed at 1.4 percent.
“We’ve had a lot of positive indicators the past year, around housing markets and the equities markets and, to a large extent, the capital markets, but there are still many questions about where the growth is going to come from,” Dickinson said.
Likewise, many CFOs now indicate lower perceptions of the status and trajectory of the North American economy than they have over the past two quarters, Dickinson said.
In the third-quarter, 38 percent of CFOs classified the region’s economy as good. But in the fourth-quarter analysis, just 26 percent said the same.
“When you see the expectations for the North American economy slip a bit, it signifies that CFOs are, again, having trouble figuring out what the story is for where growth is going to come from,” he said.
Still, North America’s economy, while not as sunny as earlier surveys suggested, remains reasonably fair when compared to other economies, Dickinson said.
For instance, the proportion of CFOs who classified the European economy as good remains below five percent, but the proportion viewing it as bad dropped to 63 percent – an improvement from 80 percent reported in the third quarter and 90 percent reported in the second quarter.
Similarly, expectations for China rebounded, with 33 percent of CFOs saying the Chinese economy is good, up from 25 percent last quarter.
“Yes, it looks like perceptions of China got a little better. Perception of Europe got a little better, too,” he said. “But neither is particularly strong. And while perceptions of North America slipped a little, it’s still far and away the brightest source of light at the moment.”
A bright spot, Dickinson said, was that earnings growth projections increased, from 8.0 percent to 8.6 percent. But this, too, comes with an asterisk, as this expectation remains far below the survey’s nearly four-year average of almost 12 percent.
Similarly, while capital spending rebounded this quarter from 4.9 percent to 6.4 percent, it remains well below the survey’s historical average of 8.6 percent.
“When you look at spending numbers, they’re not that strong either,” Dickinson said. “I think it’s the same driver, which is if you don’t have pretty good confidence that spending is going to get better and that the economy is going to get better, it’s hard to invest in growth.”
ECONOMIC AND REGULATORY CONCERNS CONTINUE
CFOs continue to express high levels of concern regarding government economic policy, regulation, and the effects of the potential end of quantitative easing, Dickinson said.
This, of course, should come as no great surprise, as past surveys have suggested these concerns have been on the rise for quite some time.
“The whole area of general regulation and industry-specific regulation, those are always at the top of CFOs’ worries,” Dickinson said. “It makes it very difficult to plan, and it’s probably one of the bigger issues hitting the capital-investment expectations.”
In this latest survey, the trend continued. Industry specific regulation was reportedly cited as an extensive impediment by 45 percent of CFOs overall, with the highest prevalence in the financial, healthcare and pharmaceutical, and service sectors.
Government spending and budget was cited as a substantial impediment by 40 percent of respondents.
Dickinson said that this is the first quarter in which CFOs voiced strong concerns about the short and long-term impacts of the U.S. stimulus program.
The prospect of the Federal Reserve tapering and eventually ending its bond purchases is clearly causing concerns about the future of capital markets, economic growth, and customer demand, he added.
“This quarter, you’ve got the additional government-related worry around what the effects of monetary policy are going to be as the Fed’s bond-buying program winds down,” he said.
What’s that going to mean for interest rates? Is it going to slow the economy? These are all legitimate questions, Dickinson said.
“It just adds one more significant source of uncertainty,” he said. “I’m not sure anybody is comfortable that they understand what all the flow-through implications are going to be from a wind-down of the stimulus.”
And there’s another concern that continues to linger: the unknown impact of the Affordable Care Act (ACA) on healthcare costs.
Dickinson said U.S. CFOs indicate little impact on the scope and quality of their healthcare benefits, but they cite significant impact on costs.
Nearly 60 percent of survey respondents said their organizations have raised or will be raising their employees’ financial responsibility for costs, and about half said the ACA is the reason.
About 13 percent said they have reduced earnings forecasts due to the act – also known as Obamacare – and about 8 percent said they have constrained hiring.
“I think what we learned from the question that we asked this quarter is that, when it comes to the impact of the ACA on very large companies, it’s not the same as being tacked on some of the smaller and mid-market companies, mainly because a lot of them have offered benefits that have been pretty progressive for a long time,” Dickinson said. “A lot of these companies have offered coverage to a very large proportion of their employees, so in that way, they tend to not be as affected as much as some of the smaller companies.”
The only real exception, he added, is that some of the bigger companies may have a large number of part-time or seasonal workers.
“But by and large, having to offer deeper coverage to a broader range of people isn’t the biggest challenge for these large companies,” he said.
What is a challenge, though, is the general, overall rising costs of healthcare, Dickinson said. And as the ACA has come more and more into play, it’s given companies of varying sizes more reason to look into whether they’ve adapted the best approaches to controlling costs.
Sanford Cockrell III, national managing partner at Deloitte’s CFO Program, said that while nearly all companies, internally, remain confident in their ability to grow margins, the fluctuating economy and ongoing regulation concerns will remain troublesome for CFOs throughout the year.
“CFOs remain troubled by uncertain economic growth and slow progress in Washington, D.C., even with the recent budget deal,” he said. “With risk, rationalization, and cost concerns back on the table again, it seems many organizations are not hitting the gas as they enter 2014.”
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