Economic Optimism Falls to 15-Month Low
CFOs Expect Libor Rate to Reach 4.45% in Next 12 Months
Feldstein Top Choice for New Fed Chairman
FLORHAM PARK, N.J., and NEW YORK, Sept. 16 /PRNewswire/ -- Corporate
America is taking the increased cost of oil on the chin.
Almost half (46%) of the 315 CFOs surveyed in the third quarter "CFO
Outlook Survey," conducted by Financial Executives International and Baruch
College's Zicklin School of Business when the price of oil was more than $70 a
barrel, say their companies are absorbing most or all of the additional energy
costs. So far, only 7% of all CFOs surveyed say their companies are passing
most of the cost along to customers.
A significant minority of the surveyed respondents, 29%, say they are not
directly affected by high oil prices. These companies were predominantly from
service businesses, including communications, technology, banking/finance,
health care and consulting. Probably hardest hit by rising oil prices are
companies in the manufacturing sector, where 60% say they are absorbing the
cost, and another 28% are absorbing half and raising prices to cover the other
half.
"The corporate cost of higher oil, so far, is being borne predominantly by
the companies themselves," Burton Rothberg, Assistant Professor of Accounting
at Baruch College, observed. "As a result, we can expect corporate earnings
or capital spending to be affected, at least until prices to customers are
increased. Consumers, who are already bearing the brunt of high oil prices at
the gas pump and bracing for higher home heating costs, will have more bad
news down the road if and when companies decide to pass along more of the
costs," he concluded.
A Snapshot of Current Economic and Corporate Events
In addition to information about oil prices, CFOs participating in this
quarter's survey provided their views on a wide range of topics. Highlights
are below, followed by additional detail.
* CFO economic optimism has reached a 15-month low.
* Increases in capital and other spending will be moderate.
* Interest rates are expected to rise to 4.45% in the next year.
* Ebbers' sentence was about right and Sullivan's was too short.
* Martin Feldstein and Robert Rubin are top choices for Fed Chairman.
* Changes to improve defined contribution retirement plans are underway.
* Smaller companies should have more time to comply with Sarbanes-Oxley.
Economic Optimism Drops
The CFO Optimism Index of the U.S. economy, which is now 65.35, has been
dropping since June 2004, losing 3.3 points from last quarter. This quarter,
only 65% of the CFOs thought the outlook for the economy was positive, down
from 72% in the first quarter.
CFOs' feelings about their own companies' financial prospects have been
holding virtually steady however. The Optimism Index of CFOs' own companies'
registered 73.43 this quarter, compared to 74.09 in the last quarter.
Seventy-three percent were positive, virtually unchanged during 2005.
"The economic data that we've seen over the past few months, most notably
slowing consumer spending, steadily climbing short-term interest rates, and
soaring energy costs, have understandably caused a decline in CFO optimism,"
noted Professor Rothberg. "While it's true that the decline in overall
economic optimism is a worrisome yellow flag, CFOs' view of their businesses
is based on their own order books and first-hand knowledge, not what they read
about in the media. It may be the more reliable measure of what's to come."
Spending and Interest Rates
Anticipated capital spending for the next 12 months rose slightly to 6.0%
from 5.1% last quarter, but is significantly less than the average
expectations expressed in the last six surveys. Technology spending forecasts
for this quarter and last quarter are also lower than the forecasts of the
four prior quarters. "Companies appear to be 'keeping their powder dry' and
waiting to invest until they anticipate more favorable business conditions,"
noted Professor Rothberg.
More than half (54%) of the CFOs surveyed expect the three-month
Eurodollar interest rate to rise from its current rate of less than 4% to
4.45% in the next 12 months, consistent with the futures market forecast.
Corporate Wrongdoers Should be Punished
CFOs hold similar views about recent verdicts in trials of corporate
executives, believing as a group that the punishment for corporate wrongdoers
should be severe. Three-quarters of respondents feel that the 25-year sentence
of Bernie Ebbers, former CEO of WorldCom convicted of security fraud, was just
about right or even too short. Scott Sullivan's sentence of five years in
prison was deemed by 60% as too short. Mr. Sullivan, WorldCom CFO, who
pleaded guilty to fraud and conspiracy, was the government's star witness in
the Bernie Ebbers' trial. Regarding Richard Scrushy, former CEO of Health
South, only 4% of the surveyed CFOs believe that his jury was correct in
acquitting him on charges of financial fraud.
"These are strong opinions from our members, reflecting their anger at how
these executives misused their power. CFOs recognize the costs to
shareholders, the economy and corporate reputation caused by these high-
profile scandals," said Colleen Cunningham, FEI President and CEO.
Straw Vote on the New Fed Head
CFOs' leading favorites for the successor to Alan Greenspan as head of the
Federal Reserve Board are Martin Feldstein, Harvard economist and Chief
Economic Advisor in the Reagan Administration, who was mentioned by 28% of
respondents, and Robert Rubin, a Director of Citigroup and Treasury Secretary
in the Clinton Administration, at a close second with 27%.
DC Plan Features Changing
Efforts to improve participation and increase savings in defined
contribution (DC) retirement plans are taking hold. At companies with a DC
plan, 26% include an auto enrollment feature; within this group 21% have added
that feature in the past year. Nearly half (47%) offer lifestyle funds, with
15% of this group adding these choices in the past year, and over a third
(35%) offer personalized investment advice, with 14% of this group adding this
option in the past year.
United Views on Sarbanes-Oxley
CFOs are nearly united in their views on whether the deadline for smaller
companies to comply with Sarbanes-Oxley Section 404 should be extended by one
year. Eighty-three percent support a one-year extension or indicate that the
deadline should be extended even further.
About the Survey
Full survey results will be available September 20 at
http://www.cfosurveys.com. For information prior to that, please contact
andrewhealy@towerspr.com.
This quarter, the CFO Outlook Survey, conducted by Financial Executives
International and Baruch College's Zicklin School of Business, interviewed 315
corporate CFOs electronically in late August and early September. CFOs from
both public and private companies and from a broad range of industries,
revenues and geographic areas, including some off-shore companies, are
represented. Survey respondents are members of Financial Executives
International.
Revenue-weighted averages are provided for projected changes in capital
and technology spending. Employee-weighted averages are used for projected
changes in health care costs.
FEI has been conducting surveys gauging the country's economic outlook
from the perspective of corporate CFOs for the past eight years.
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.
Baruch College, founded in 1847, is a senior college of the City
University of New York. The Zicklin School of Business at Baruch College is
the largest collegiate school of business in the nation, producing graduates
who assume leadership positions in all areas of American business as well as
conduct important academic research. Baruch has one of the largest accounting
programs in the country whose graduates become practicing CPAs.
SOURCE Financial Executives International; Baruch College
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Related links:
http://www.fei.org
http://www.cfosurveys.com
Company News On-Call:
http://www.prnewswire.com/comp/310650.htm
CONTACT:
Chris Allen of FEI, +1-973-765-1058,
callen@fei.org; or Burton Rothberg of Baruch College, Zicklin
School of Business, +1-646-251-4211, burt@rothberg.net; or Andrew
Healy of TowersGroup, +1-212-354-5020, andrewhealy@towerspr.com,
for FEI
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