Chief financial officers recorded significant optimism regarding their organization’s prospects and forecasted a boost to earnings, sales and hiring for the year ahead, according to Deloitte’s third quarter (Q3) CFOSignals survey. However, CFOs remain wary of external risks, as concerns over equity market valuations, the European economy, political interference, economic and financial risks and government tax policy were expressed.
The survey, which tracks the thinking and actions of more than 100 CFOs from large North American companies, recorded an overall increase in net optimism quarter-on-quarter from +25.7 to +32.0.
The improved level of optimism was reflected in increases to CFOs’ expectations for key performance metrics. Year-over-year expectations for sales growth rose to 6.8* percent, the highest level recorded for three years and the third consecutive quarterly increase from a survey low of 4.1* percent at the end of 2013. (*All numbers with an asterisk are averages that have been adjusted to eliminate the effects of stark outliers.)
Hiring expectations hit a five quarter high of 2.3* percent, a rise from 1.6* percent in the second quarter, though hiring forecasts by U.S. CFOs were not as positive as their Canadian and Mexican counterparts, rising only from 1.4* percent to 1.7* percent.
Despite these figures, there are a number of concerns still prominent in CFOs’ minds. Sentiment regarding performance of the European and North American economies one year from now fell for the second consecutive quarter. Overall though, CFOs continue to believe the North American economy will be better, not worse, one year from now.
The majority of CFOs, 63 percent, also continue to believe that U.S. equity markets are overvalued while 47 percent believe external financial and economic risks are higher than normal. Only 14 percent believe such risks are lower. Concern over government tax policy and reform also increased. This reflects a wider concern with 65 percent of CFOs expecting moderate or high disruption to their business from government regulation.
“There is a clear shift to a more positive outlook this quarter as well as a level of optimism not seen in recent years,” said Sanford Cockrell III, national managing partner, Deloitte LLP and leader of the Deloitte CFO Program. “While familiar risks remain on the radar, sentiment has ticked up from previous quarters.”
Despite CFOs’ improved outlook and confidence on growth prospects, one key metric that did not increase this quarter was the forecast for capital spending growth. Year-over-year expectations declined to 5.0* percent, a decrease from 6.8* percent in the second quarter and the lowest level since the third quarter of 2013.
In the U.S., CFOs forecast even lower capital spending growth of 3.5* percent, an all-time survey low. The figures continue a long-term decline in capital spending forecasts since the survey began in 2010. Forecasts were typically close to 12 percent in the first quarter of each year between 2010 and 2012 but have declined markedly since then.
“We may be seeing signs of a new, lower normal for capital spending levels,” noted Greg Dickinson, director, Deloitte LLP, who leads the North American CFO Signals survey. “Some organizations may have developed excess capacity during the recovery, while others may now be less reliant on hard assets for growth – and more reliant on digital technologies that scale relatively inexpensively. And we may be seeing some companies exchanging company-owned assets for outsourced services.”