By Deloitte, Special for USDR
Surveyed chief financial officers’ (CFOs’) long-term outlook for the North American economy remains strong despite their weakening confidence in their own companies’ prospects, according to Deloitte’s second quarter (Q2) “CFO Signals™” survey. Lower expectations for growth in revenue, earnings, and domestic hiring appear to be behind this declining sentiment.
The survey, which tracks the thinking and actions of over 100 CFOs from large North American companies, recorded a 10th straight quarter of positive net optimism. However, this quarter’s net optimism of plus 18.8 percent is one of the lowest levels in two years and is down significantly from last quarter’s plus 34.4 percent. Moreover, the percentage of CFOs expressing rising optimism in their company’s prospects fell to 38 percent from last quarter’s 48 percent. Further, 65 percent of CFOs believe U.S. equity markets are overvalued, up from 46 percent in the previous quarter and represents the highest level in a year.
The sharp decline in expectations for the survey’s key performance metrics is perhaps the most revealing indicator of CFOs’ changing sentiment in the second quarter. Revenue growth expectations are down to 3.1* percent, resulting in the lowest level in the survey’s five-year history, from 5.4* percent last quarter. The Energy/Resources industry is a significant driver of lower expectations, falling to negative 2.5* percent from negative 0.2* percent last quarter, but all industries experienced a decline. Earnings expectations are at their lowest level in the history of the survey as well, dropping to 6.5* percent from 10.6* percent last quarter. Only Financial Services CFOs expect an increase in earnings this quarter. Domestic hiring expectations also fell to their lowest levels in over a year to 1.2* percent from 2.4* percent last quarter.
“CFOs are less optimistic about their own companies this quarter, in part due to uncertainty around the condition and trajectory of the U.S. economy,” said Sanford Cockrell III, national managing partner, Deloitte LLP, and global leader of the Deloitte CFO Program. “The prospect of a pullback in the U.S. economy, possible interest rate increases and high equity valuations are among the most worrisome risks for CFOs this quarter.”
The declining optimism in company prospects contrasts with CFOs’ broader outlook on the North American economy. Fifty-nine percent of CFOs describe the North American economy as either good or very good, unchanged from last quarter.
CFOs’ outlook for other global economies is mixed. Just 5 percent of CFOs describe Europe’s economy as good or very good (up from 2 percent last quarter), but the proportion of CFOs describing it as bad falls from more than 70 percent over the past two quarters to 46 percent this quarter. Nearly 30 percent of CFOs believe Europe’s economy will be better off a year from now, up from 27 percent in Q2 2014. Twenty-three percent of CFOs say China’s economy is good, up from 18 percent last quarter, and 20 percent describe it as bad, up from 16 percent last quarter.
“This quarter’s survey marks a significant shift in CFOs’ expectations for their companies’ performance over the next year,” said Greg Dickinson, director, Deloitte LLP, who leads the survey. “Although they again voice considerable confidence in the trajectory of North American and other major economies, their declining sales and earnings expectations seem to indicate significant concern about the next twelve months.”
Surveyed CFOs are also concerned about a number of internal and external risks. Externally, issues that continue to be challenging for CFOs include global economic concerns like risks associated with trade and FX impacts of central banks’ monetary policies. CFOs believe rising commodity prices and the burden of government regulation are priority concerns as well. From an internal standpoint, attracting and retaining finance talent remains an ongoing issue. More than 70 percent of CFOs cite initial shortages of consultative, partnering, analytical and technical skills among staff.
Crisis preparedness is another issue weighing on CFOs this quarter, with cyber-security attacks cited as the most threatening potential crisis. Almost one-fourth of CFOs say they are insufficiently prepared for an attack and only 10 percent feel well-prepared. Technology and Financial Services CFOs feel the most unprepared, with 50 percent and 30 percent citing this concern, respectively. Eighty-five percent of CFOs consider malicious attacks such as terrorism or tampering a major concern, while only four percent feel well-prepared.
Additional findings from the Deloitte Q2 “CFO Signals” survey include:
- Employees will bear more responsibility for rising health care costs: Nearly 80 percent of CFOs say they are managing health care costs by shifting financial responsibility to employees. The proportion is highest in the U.S. at nearly 95 percent, withMexico and Canada at 31 percent and 40 percent, respectively.
- Compensation will rise modestly: Salary and wages are expected to rise 2.9 percent over the next year, with Financial Services highest at 3.6 percent and all other industries at 2 percent or above. Sixty-three percent of CFOs believe compensation will increase for highly-skilled staff and 44 percent believe the same for low-skilled workers.
- Executive compensation remains unadjusted in response to strong U.S. dollar: More than 75 percent of CFOs do not plan to adjust executive compensation in response to the strong U.S. dollar, believing executive and shareholders’ situations should be similar whether the exchange rate is favorable or not.
To download a copy of the survey, please visit: http://www.deloitte.com/us/cfosignals2015Q2 .
*All numbers with an asterisk are averages that have been adjusted to eliminate the effects of stark outliers.
About The Deloitte CFO Survey
The Deloitte CFO Signals™ survey for the second quarter of 2015 was conducted during the two-week period ended May 22. Eighty-four percent of the 101 CFO respondents were from organizations with more than $1 billion in annual revenues, and 71 percent were from publicly traded organizations.
Each quarter, CFO Signals tracks the thinking and actions of CFOs representing many of North America’s largest and most influential organizations. This report summarizes CFOs’ opinions in four areas: business environment, company priorities and expectations, finance priorities and CFOs’ personal priorities.
For more information about Deloitte’s CFO Signals, or to inquire about participating in the survey, please contact NACFOSurvey@deloitte.com.
About Deloitte’s CFO Program
The CFO Program brings together a multidisciplinary team of Deloitte leaders and subject matter specialists to help CFOs stay ahead in the face of growing challenges and demands. The program harnesses our organization’s broad capabilities to deliver forward thinking and fresh insights for every stage of a CFO’s career – helping CFOs manage the complexities of their roles, tackle their organization’s most compelling challenges, and adapt to strategic shifts in the market. For more information about Deloitte’s CFO Program, please contact email@example.com or visit www.deloitte.com/us/thecfoprogram.
As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.