Finance Chiefs: Glum and Glummer

Attention, investors: Chief financial officers' outlook for the economy fell to a record low this quarter. Why? Forecasts of anemic growth in earnings, capital spending, and takeover activity—and no growth in hiring.

For good measure, they are also worried about flagging consumer demand, rising labor costs, and difficult credit markets.

The glum outlook comes from the 1,316 C.F.O.'s who responded to a Duke University/CFO Magazine survey that concluded last Friday. Duke released the results today.

"The optimism index reached a record low, far lower than we have observed previously," said John R. Graham, director of the survey and a finance professor at Duke's Fuqua School of Business. "With pessimists greatly outnumbering optimists, the prospects for the U.S. economy are very poor, with a recession a distinct possibility."

And don't count on the Federal Reserve to ride to the rescue. C.F.O.'s, like almost everyone else, are already mostly assuming the Fed will cut rates next week; they just don't think it will help much.

"Cutting the Fed Funds rate by 50 basis points is not a panacea to the corporate borrowing problems," said Duke professor Campbell R. Harvey, founding director of the survey. "Forty-five percent of C.F.O.'s say that a 50 basis-point drop will not help their ability to borrow, and another 37 percent say that it would only help a little."

Americans comprised a plurality of responders—580 of them answered the call. The outlook for the U.S. economy and policy was limited to these finance chiefs.

Chinese C.F.O.'s were next in line, with 380 responses. The rest were split between Europe (181) and Asia outside of China (175). RSM Erasmus University in the Netherlands pitched in on the survey of European executives.

In the past, the C.F.O. index has accurately predicted capital spending, employment, and earnings, Graham said.

Among the findings:

• Optimism reached its lowest point since the survey began six years ago.
• Pessimists outnumber optimists by roughly a four-to-one margin, with 61.7 percent of CFOs more pessimistic and only 13.6 percent more optimistic about the U.S. economy than they were last quarter.
• Capital spending is expected to increase only 3.2 percent, and domestic employment will be flat, though outsourced employment should rise 5.9 percent.
• C.F.O.'s were most worried about weakening consumer demand, rising labor costs, and tumultuous credit markets.
• Tighter and more expensive credit and weaker economic growth will snuff out the mergers and acquisitions boom; private equity buyers will be particularly hard hit.

Optimism diffusion measures the percentage of CFOs who have increased optimism minus the percentage who have decreased optimism (through September 2007). The survey measures C.F.O.'s forecasts for the economy in general for their own firms in particular.

by Mark Stein