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CFOs SEE ECONOMIC REBOUND, BUT NOT THIS YEAR

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Energy Prices Jump in 85% of Companies – But Only 1 in 5 Pass Cost Along

DURHAM, N.C. and MORRISTOWN, N.J., June 26, 2001 — Chief Financial Officers predict U.S. economic growth will remain slow during 2001 but foresee an economic rebound next year. They also anticipate moderate corporate earnings increases over the next twelve months. They do not, however, expect the recently mandated tax rebates to contribute to their firm’s revenues. Moreover, they support an additional 50 to 100 basis point reduction in interest rates.

These are some top-line findings of the most recent quarterly “CFO Corporate Outlook Survey” conducted by Financial Executives International (FEI) and Duke University’s Fuqua School of Business. Participating in the survey were 222 CFOs at companies representing a broad range of industries, geographic areas and revenues. This is the fifth year that FEI and Fuqua have conducted the quarterly survey gauging the country’s economic outlook from the perspective of corporate CFOs.

Cautious Optimism

The findings of this quarter’s survey parallel many of the expectations of last quarter.

The CFOs, on average, predict that U.S. GDP will grow by 1.9% during the next 12 months, a slight rise over last quarter’s 1.6% prediction. In terms of timing of a GDP rebound to at least 3% annually, almost two-thirds (64%) think the rebound will take place in the first, second or third quarters of 2002. Nine percent expect a later economic pick-up, and 27% expect the rebound this year.

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Still, 63% of CFOs forecast their companies’ earnings to increase over the next 12 months. The revenue-weighted average earnings increase across all companies is expected to be 11%, with the median earnings increase at 5%. These results are similar to last quarter’s. Productivity is expected to increase by 3% on average, with a 2% increase for the median firm, down slightly from last quarter’s expectations.

CFOs expect the stock market to return 6.1% over the next twelve months, a moderately more optimistic view than last quarter’s 5.3% expectation. U.S. inflation is expected to be 2.7% over the next 12 months.

Overall, 67% of the CFOs say they are more or equally optimistic about the economy compared to six months ago (40% more, 27% equally). However, one-third are less optimistic.

"CFOs see light at the end of the tunnel, but it’s at least six months away,” says John Graham, finance professor at Fuqua and the director of the survey. “As we work our way into 2002, corporate CFOs anticipate higher earnings and stock prices.”

What Companies Are Doing

U.S. companies will respond to the slow GDP growth by reducing inventories. Fifty-one percent of firms will reduce inventory during the next 12 months, and another 30% will hold inventory levels constant. Inventories will decline 3.1% on average across all companies.

Regarding employment, 26% of companies plan on reducing employment during the next 12 months, and another 26% will hold employment steady. Last quarter’s employment responses closely paralleled the current quarter results. In the 5-year history of the survey, this quarter and last were the only times that the majority of companies have not planned to increase employment. Additionally, 39% of companies will reduce overtime during the next 12 months, and 41% will hold overtime constant, virtually the same as last quarter’s plans.

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Other company plans include:

· Capital spending: Like last quarter, 34% of companies will cut capital expenditures, and another 22% (17% last quarter) will hold them steady. Across all companies, capital spending will decrease by an average of 1.3%, down from an expected increase of 5% last quarter.

· Pricing: Weighting the responses by firm revenues, CFOs expect the prices of their companies' products to increase 1.3% during the next 12 months, in comparison to an increase of only 0.6% predicted three months ago. Among the 59% of firms that expect to boost prices, the average price increase will be 3%.

· Wages: Wages and salaries are expected to increase 3.3% at the average firm during the next 12 months, lower than last quarter’s prediction of 4.4% wage inflation.

Even in a sluggish economy, 58% of firms still expect to increase technology spending in the next 12 months relative to last year’s spending. The revenue-weighted average increase will be 2.2%, compared to 4.4% last quarter.

“Technology continues to be a positive surprise,” said Graham. “Despite companies’ broad-based attack on expenses, technology appears to be an area where companies can’t afford not to spend, though at a lower rate than last quarter.”

The Energy Toll

Rising energy prices have contributed to the CFOs’ modest economic outlook. Eighty-five percent of firms report that energy and electricity prices have increased during the past six months – but only one in five firms expects to pass these increased costs on to customers. Among the firms passing the cost along, rising energy prices will contribute 3.7% to product inflation. Only one in nine firms will pass the increased energy prices along to customers as an energy surcharge.

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Interest Rate Views

CFOs believe that the Federal Reserve Bank should stimulate the economy with further interest rate reductions. Seventy-seven percent of the CFOs think that the Fed should reduce interest rates, and among this group half think that the Fed should reduce interest rates by 50 basis points, and one-third think that the decrease should be 100 basis points.

Tax Refund Impact

When asked if the tax rebate estimated at $300 per taxpayer would lead to an increase in their firm’s revenues, only 11% felt it would. Eighty-four percent don’t expect the rebate to increase revenues, and 5% are uncertain.

Stock market

CFOs have a more optimistic view of the stock long-term than they do short-term. Over the next 10 years, they expect the stock market to return about 9.2% annually (as measured by the S&P 500), compared to their 6.1% prediction for the next 12 months. Graham notes that this 12-month forecast represents a market risk premium of less than 1% over the yield on Treasury bills. “This is much lower than the historical risk premium of closer to 8% over T-bills," he adds.

In terms of best and worst case, the CFOs think there is a 1-in-10 chance that the market will only break even over the next 12 months, though their more optimistic 1-in-10 scenario is that the market will return 13.4% or more.

About the Survey

The CFO Corporate Outlook Survey is conducted quarterly by Financial Executives International and Duke University’s Fuqua School of Business. Each survey polls a group of CFOs from more than 5,000 U.S. companies on macro and company-specific economic and business issues. This survey was completed on June 15, 2001. Of the 222 companies represented this quarter, median revenues were $100 million to $500 million. Fifteen percent of the participating companies have revenues of over $1 billion.

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Among the industries represented are retail/wholesale, mining/construction, manufacturing, transportation/energy, communications/media, technology, and banking/finance/insurance. This survey and prior survey results are available at http://www.duke.edu/~jgraham/fei.html or www.duke.edu/%7ejgraham.

Financial Executives International (FEI) is the leading advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers, and controllers. FEI enhances member professional development through peer networking, career planning services, conferences, publications, and special reports and research. Members participate in the activities of 86 chapters, 75 of which are in the United States and 11 in Canada. For more information about FEI, visit www.fei.org.

The Fuqua School of Business at Duke University was founded in 1970. Fuqua’s mission is to educate thoughtful business leaders worldwide and to promote the advancement of business management through research. For more information, visit www.fuqua.duke.edu.

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