Depreciated Dollar Helping Revenues
Spending and Hiring Still on Hold
Companies Weighing Fatter Dividend Payouts
DURHAM, N.C. and FLORHAM PARK, N.J., June 24 /PRNewswire/ -- Chief
Financial Officers of U.S. companies have a renewed optimism about the U.S.
economy and predict an increase in their companies' revenues and earnings.
According to the June "CFO Outlook Survey," conducted by Financial
Executives International (FEI) and Duke University's Fuqua School of Business,
more CFOs are optimistic about the economy than they have been for over a year
(see attached chart). Nearly seven out of ten CFOs are more optimistic this
quarter (last quarter 25%), and only 7% are less optimistic, compared to
almost half (45%) that were less optimistic about the economy last quarter.
CFO optimism is also up for their own companies. This quarter half are more
optimistic about their companies' financial prospects, compared to 37% last
quarter.
The surveyed CFOs say that corporate earnings will increase on average
13.5% (median, 10%) over the next 12 months. Sales revenues are expected to
increase for 79% of firms, with an average increase in revenues of 6.3%
(median increase of 5%). Both revenue and earnings expectations are up
relative to last quarter.
The CFOs say their favorable outlook is driven in part by the value of the
U.S. dollar. One in five companies states that sales (number of units sold)
will be higher in the second half of 2003 due to the dollar's depreciation.
The CFO optimism about the overall economy also shows up in higher
expectations about Gross Domestic Product. Last quarter, CFOs expected GDP to
increase by 1.7%, while this quarter GDP is expected to grow by 2.2% over the
coming year (median expected increase of 2%).
Spending and Employment
Despite their optimism, CFOs report that capital spending will increase by
only 1.5% during the next 12 months. Further, two-thirds of companies say
that they are spending at depressed levels, if at all (55% are spending
cautiously and 13% are holding off altogether). One-fourth of companies (26%)
are spending at a normal level, and only 6% are spending aggressively.
Among those that are spending cautiously or holding off altogether, only
8% say that capital expenditures will return to normal during the next six
months and 25% say during the first half of 2004.
Technology spending will remain slow for the next twelve months, with an
average increase of only 2.1%. Advertising spending will be flat.
Employment plans are also virtually flat. 43% of companies expect to
increase their number of employees, in contrast to 32% that will reduce
employment. On average, employment is expected to decline by 0.4% (median: no
change).
The U.S. dollar depreciation is having a less positive impact on capital
spending and hiring than it is on sales. While 20% of the surveyed CFOs that
say the depreciated dollar is increasing sales, only 3% say it will increase
capital spending and only the same number say it will increase hiring. Among
firms with foreign sales that make up at least one-fourth of their total
sales, 51% say that the depreciated dollar will lead to increased sales;
however, even among these firms, only one-in-ten says that the depreciated
dollar will lead to increased capital spending or hiring.
"While the depreciated dollar will help sales revenue and earnings, these
gains will unfortunately have little feedback effect on corporate spending and
hiring plans," said Dr. John Graham, finance professor at Fuqua and director
of the survey. "Our big concern is deflation because it would significantly
hurt the already modest capital spending plans."
Beware: Deflation
If deflation were to occur to the extent that overall prices decline by
2% per year, 40% of the surveyed companies would decrease capital spending and
46% say that they would delay all spending.
"These views are consistent with the effects of deflation during the Great
Depression," notes Dr. Graham. "If costs are expected to fall, then companies
wait rather than spend now, because the cost of spending is expected to be
lower in the future. This can in turn have negative effects on the overall
economy, wages and hiring. Alan Greenspan has acknowledged the potential
dangers of deflation, and we are confident that the Federal Reserve Bank is
taking appropriate actions to keep deflation at bay."
Legislative Changes Have Impact
The recent reduction in capital gains and dividend tax rates to 15% is
expected to reduce the cost of equity capital at 22% of the companies
surveyed, with 14% saying their cost of equity will drop a little and
8% saying the reduction will be large. Dr. Graham notes that a reduced cost
of equity can lead to reduced overall cost of capital and finally to increased
investment.
The reduction in dividend tax rates could also lead to increased dividend
payments. Among companies in the survey that currently pay dividends, 28% say
they probably will increase dividends and 2% say they definitely will. Among
survey companies that do not currently pay dividends, 13% say that they
probably will initiate dividends in response to reduced dividend taxation,
though none say their plans are definite. Dr. Graham says that increased
dividend payments could contribute to consumer spending but does not
anticipate any significant increase.
Another legislative change will contribute to an increase in capital
spending at one-quarter of companies. The new bonus depreciation provision
that allows a 50% deduction of the adjusted basis of qualified property placed
in service before January 1, 2005 will lead to a small increase in spending at
15% of companies, a moderate increase at 10% of companies, and a large
increase at 1%.
About the Survey
The CFO Outlook Survey, conducted by Financial Executives International
and Duke University's Fuqua School of Business, interviewed 404 CFOs of U.S.
companies electronically the third week of June. CFOs from both public and
private companies and from a broad range of industries, geographic areas and
revenues were represented. Among the industries represented are
retail/wholesale, mining/construction, manufacturing, transportation/energy,
communications/media, technology, and banking/finance/insurance.
Revenue-weighted means were provided for earnings, capital spending,
technology spending, advertising spending, inventory and prices of products.
Employee-weighted means were used for productivity (output per hours worked),
wages, number of employees and overtime.
FEI and Fuqua have conducted surveys gauging the country's economic
outlook from the perspective of corporate CFOs for the past seven years.
Detailed results of this survey as well as other "CFO Outlook" surveys are
available at http://www.cfosurvey.org or http://www.duke.edu/~jgraham
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 http://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 http://www.fuqua.duke.edu .
Contact:
Abby Katzen Chris Allen Dan McCleary
TowersGroup FEI Duke-Fuqua
212.354.5020 973.765.1058 919.660.2903
abbykatzen@towerspr.com callen@fei.org mccleary@duke.edu
SOURCE Financial Executives International; Duke-Fuqua
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Related links:
http://www.fei.org
http://www.fuqua.duke.edu http://www.cfosurvey.org
http://www.duke.edu/~jgraham
Company News On-Call:
http://www.prnewswire.com/comp/310650.html
CONTACT:
Chris Allen, FEI, +1-973-765-1058,
callen@fei.org; or Dan McCleary, Duke-Fuqua, +1-919-660-2903,
mccleary@duke.edu; Abby Katzen, TowersGroup, +1-212-354-5020,
abbykatzen@towerspr.com, for Financial Executives International
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