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CFOs More Pessimistic About Economy, Duke Survey Says

Chief financial officers are becoming more pessimistic about the U.S. economy, according to a survey by Duke University’s Fuqua School of Business.

The CFOs expect slower growth in earnings, capital spending and hiring, the survey says. They’re also concerned about rising labor costs and weakening consumer demand.

“With pessimists outnumbering optimists, the prospects for the U.S. economy are poor,” said John R. Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business.

The survey’s optimism index neared a five-year low. Only 26% of CFOs are more optimistic about the U.S. economy than they were last quarter, down from 35% in March. Thirty percent are more pessimistic.

In an interview with CNBC, Kate O'Sullivan, staff writer at CFO Magazine, said the glum outlook stems from several factors, including executives having a "hard time finding skilled employees."

"A couple of CFOs I spoke with don't really have plans for hiring," she said. She added that they have no plans to increase technology or advertising spending, either, which will accelerate an economic slowdown.

O'Sullivan said CFOs are pessimistic about merger and acquisition activity over the next two years, as many feel that "the best deals have already been done."

The survey, concluded June 1, includes responses from 804 CFOs, including 484 from the United States, 172 from Asia and 148 from Europe.

“The CFO optimism index has a good track record of predicting future capital spending, employment and earnings," Graham said. "The main reasons that CFOs cite for their reduced economic optimism are increased fuel (costs) and slowing consumer demand, driven in part by a weak housing market.”

In the U.S., the survey found:

  • Capital spending is expected to grow by 5.2% in the next 12 months, down from 6.7% predicted in March.
  • On Average, companies expect little employment growth over the next 12 months, compared with a 1.6% increase forecast in March.
  • Outsourced employment is expected to increase by nearly 7%.
  • Corporate earnings are expected to grow 8.6% in the next 12 months, down from double-digit growth expected a year ago. The earnings slowdown is expected to be the greatest in transportation and manufacturing.
  • Companies expect wages and salaries to increase, on average, more than 4% in the next 12 months.
  • M&A activity is expected to remain strong in 2007, with 36% of firms expecting to increase activity, 56% expecting M&A to continue at the same pace as last year and 7% expecting activity to slow. CFOs expect M&A activity to be strong in service, consulting, healthcare and technology.
  • CFOs expect inflation to boost prices of their own products by 2.3% next year, up from 1.8% in March.
  • Productivity is expected to increase 3.6% in the next 12 months.
  • Consumer demand, dragged down in part by high fuel costs, is expected to weaken.

In Europe, the outlook is more optimistic than in the U.S., but down from the last quarter. Forty-one percent of European CFOs say they’re more optimistic about the economy in their country, down from 48% in March.

In Asia, two-thirds of respondents were more optimistic about regional economic growth than they were last quarter.

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