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Friday, 16 January 2009

Deloitte: Record Pessimism in Global CFOs, High Future Uncertainty

Pessimism in Global CFOs, High Future Uncertainty

Deloitte recently surveyed US Chief Financial Officers as part of a periodic quarterly initiative to understand how current stock market and economic environment is having an impact on their future expectations, concerns and plans for their companies.

The results are stunning, and by Deloitte’s own admission, “Last quarter was the first for this industry-based analysis, and our team was convinced at the time that we had just witnessed what would prove to be one of the most notable quarters in U.S. economic history. Then the fourth quarter hit, making the third seem rather mild by comparison.”

The survey group is fairly broad, 1,275 financial executives from a variety of global public and private companies. CFOs are more pessimistic now than they have ever been in 50-odd years of surveying, and we paraphrase from Deloitte’s findings:

Record pessimism
The US economy optimism index, already low for Q3-2008 at 54, fell even further to Q4-2008 to 42. A record 81% of US CFOs are more pessimistic about the economy in Q4, doubling the number from Q3. Interestingly, own-company optimism fell from 63 to 55. According to John R. Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business: “….Throughout the history of our survey, CFOs have shown remarkable ability to predict future economic conditions. Therefore, the record pessimism CFOs are currently expressing is ominous.”

Falling earnings, spending and employment
Earnings are expected to decline 9% in 2009, and U.S. companies planning to reduce work forces by 5%, capital spending is expected to fall by 10%, tech spending by 4% and marketing/advertising spending by 7%. Fuqua finance professor Campbell Harvey, says, “Right now, job number one for CFOs is to make sure the firm survives – and they\'re taking drastic actions.”

Worries over consumer demand and credit markets
Weakening consumer demand is a top concern for CFOs, followed by credit markets and interest rates, financial services industry, housing market and the new Obama administration and Congress tied for third. Not surprisingly, concerns on fuel costs and nonfuel commodities dropped sharply.

Difficulty in forecasting results and managing morale
“The uncertainty about both near-term and long-term conditions has made it nearly impossible for executives to plan for the future,” said Kate O’Sullivan, senior writer at CFO Magazine.

Impact of financial market crisis
75% of firms say financial constraints have limited their ability to invest in profitable projects. 62% say they cannot access the credit they need, and half say the cost of credit is higher when they can access it.


All this does not sound good, CFOs are by nature conservative, so usually exude more pessimism than say CEOs or CMOs, but such a drop from quarter to quarter does not bode well for economic recovery. Deloitte has succinctly captured the mood of financial executives, who are being battered on all sides by tough economic conditions, inability to accurately forecast, falling morale, slowing demand, expense control among others. As the Duke professor says, CFOs have been pretty good at forecasting bad times, and this survey as it continues into the future should provide good evidence on when the bad mood clears and better prospects for global economies can be expected.

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