Volume 16 | Issue 3 | Year 2013

Deloitte’s first-quarter CFO Signals Survey revealed greater optimism among North America’s top financial executives after a pair of dismal quarters that closed out 2012. Led by the United States, net optimism rose from -11 last quarter and up to +32 this quarter.
Further, about half of participating CFOs expressed rising optimism, compared to the pessimistic 20 percent. That’s a major shift, says Greg Dickinson, director, North American CFO Signals Survey, Deloitte LLP.

Frequent Trend
But officials warn: Current optimism runs generally high, but don’t be surprised if it gradually decreases as the year progresses. Indeed, in every survey year, Deloitte has witnessed an optimism peak in the first quarter, only to be followed by a considerable decline in following quarters, says Sanford Cockrell III, national managing partner, CFO Program, Deloitte LLP. The dominant cause, he suggests, may be a cyclical bias towards optimism at the beginning of the year.

Dickinson adds that there are two primary reasons why this trend unfolds:

  • Timing – During last and first quarters, priorities are reworked, as well as substantial end-of-the-year planning. This revolves around what companies plan to do better the next year, Dickinson says. “I think that generates an optimism that this coming year is going to be better than the last one because we have better information,” he explains.
  • Blue-Sky Predictions (but clouded) – Economic forecasts tend to be sunnier in first quarters. That’s when expectations and prospects run high, says Dickinson. This year, however, a number of companies operated under the impression that first quarter skies for 2013 were merely overcast, survey administrators say. That dynamic created a change in trend. “We didn’t see as big of a bump in optimism as in years past,” says Dickinson.

Why? Maybe some uncertainties linger. Maybe skepticism clouds the outlook.

Optimism, Cockrell says, can continue to grow and not decline as in prior years, if certain economic elements materialize. “For 2013 to be different, CFOs need some clarification on the public policy front and enough economic consistency and momentum to feel comfortable investing in growth,” he says.

Major Dragging Points
A handful of national and international issues can quickly squash new-wave optimism, officials say. These include:

  • Public policy – According to the study, more than 90 percent of CFOs say recent policy decisions and debates are having at least some impact on their companies’ plans. This, Dickinson says, includes the debt ceiling, the fiscal cliff, ongoing political and fiscal fallout stemming from last November’s US presidential election, sequestration policies, and possible defense cuts.
  • Tax policy – This area, Dickinson adds, has a substantial effect, with about 75 percent of CFOs claiming at least some impact, and 40 percent indicating substantial or strong impacts. “We ask some of the same questions quarter to quarter, and two of them are, ‘What’s your most worrisome risk? What are you most worried about?” says Dickinson.
  • The answers are forceful – and they involve prevalent fears: possible economic stagnation, and concerns about the government’s ability to bolster the economy through major policy decisions.

    One More Consideration
    Another major concern – and this is area that particularly bedevils the United States – is the potential impact from the government’s taxing and spending policies on consumer demand and the broader economy, says Greg Aliff, vice chairman and senior partner, Energy & Resources, Deloitte LLP.

    Because of uncertainty levels regarding the economy, many companies have positioned themselves in a wait-and-see mode, indicates Aliff, adding that the attitude is well reflected in survey results. The overwhelming concern, he clarifies, revolves around tax policy – “and the possible implications it could have for both corporations and the buying power of individual consumers.”

    About 40 percent of CFOs reported that their most significant approaches to dealing with policy activity involve initiating or ratcheting up their public-policy advocacy efforts, including new or revised government-relations strategies, increased lobbying efforts, and an increased executive presence in Washington, D.C.

    “What we did see, in terms of companies changing their behavior, centered on some of their public policy advocacy efforts, about them getting more active in Washington and trying to be more proactive through industry groups, in their own government relations teams, and in getting their own story out there,” Dickinson says. “As the government makes big decisions, companies want their voice to be part of the mix. Some companies have always done that, but they’re really ramping up their efforts now.”

    Expectations Rebound
    Regardless of the aforementioned concerns, some CFO expectations rebounded this quarter, the survey reported. CFO expectations for year-over-year earnings growth rose to 12.1 percent from 10.9 percent last quarter, well above a survey-low 8.0 percent in the third quarter of 2012. CFO’s outlook for capital spending jumped to 7.8 percent from last quarter’s survey-low 4.2 percent.

    There are a number of factors, but Aliff points out two:

    • Europe’s impact – “If we go back just a few months, there were still a lot of questions on people’s minds associated with the various crises in Europe and the impact they could potentially have on global growth,” he says.
    • Economic stagnation – “It wasn’t that long ago that there was a fair amount of concern about the potential for a double-dip recession,” he says. “I think those types of concerns have waned, and the concern now is less about a crisis type of situation and more about how stagnant the economy is or how sluggish the economy is going to be.”

    According to the survey, expectations for sales stayed relatively stable at 5.4 percent, compared to 5.6 percent last quarter, as did domestic hiring (0.9 percent this quarter versus 1.0 percent last quarter). However, about 27 percent of CFOs expect cuts in domestic hiring, the survey revealed.

    “Although estimates have rebounded from survey lows, most remain below their longer-term survey averages,” says Dickinson. “The best news, however, may be that many companies appear well-funded, lean, and ready to grow – and that they are looking for tailwinds and becoming more aggressive in finding growth opportunities.”

    Greg Dickinson (left) is the Director of Deloitte LLP’s quarterly North American CFO Signals survey, which tracks the perceptions, priorities and concerns of CFOs from America’s biggest companies. Greg Aliff (right) is Vice Chairman and Senior Partner, Energy & Resources at Deloitte LLP and the leader of the firm’s US Sustainability Services.

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