If you follow the markets, there's been recent reason for optimism about a U.S.-China trade deal. Some investors are buying it — literally — with recent gains in stocks attributed to positive signals from the U.S. and China after a volatile August. But there's one group of market insiders not buying the talk: corporate executives. In other words, the people who run the companies whose publicly traded shares have been rebounding.
Top executives in the U.S. and around the world are not placing bets that the U.S.-China trade war will be resolved anytime soon. In fact, corporations say they expect to feel the pain of trade tensions over the next six months, according to the third-quarter CNBC Global CFO Council survey. The quarterly survey finds CFOs around the world increasingly are worried about U.S. trade policy as a business risk factor.
Chief financial officers also downgraded their view of the U.S. economy, from "improving" to "stable."
If a trade deal remains elusive, even that stability may not last long. "With this level of uncertainty between the U.S. and China, I would think 'stable' might actually be a win a couple of quarters from now," said Jack McCullough, president and founder of the CFO Leadership Council, an executive networking group. "I cannot recall when CFOs were as jittery about a change in policy as they are today."
The CNBC Global CFO Council represents some of the largest public and private companies in the world, collectively managing more than $5 trillion in market value across a wide variety of sectors. The Q3 2019 survey was conducted between Aug. 21 and Sept. 3 among 62 global members of the council.
Thirty-five percent of CFOs cited U.S. trade policy as the "biggest external risk factor," which was more than double the second biggest risk highlighted: "consumer demand." Fears about trade were up from 22% in the second quarter. There was an important split between U.S. CFOs and those based around the world. Thirty-five percent of U.S. CFOs cited consumer demand as the top external risk factor, which can be explained by the fact that the resilience of the U.S. economy, in spite of slowdowns in Europe and China, has been based on consumer strength.
What is the biggest external risk factor currently facing your business? — CNBC Global CFO Survey Q3
U.S. CFOs taking the survey did reveal significant concerns about the trade war in other responses. About sixty-five percent said trade policy will be a negative for their business over the next six months. In Q2 that had dropped to 40% — possibly due to a prevailing and false sense of security that a deal would be easier to achieve than has proven to be the case — but it is now back up to a level consistent with the Q3 2018 through Q1 2019 surveys.
"The surprise may be that only about 65% of CFOs view that trade policy will be a negative for their organizations," McCullough said. "While at a macro level it's easy to understand the motivation behind the recent policy changes, I can't find a single CFO who has told me it would be a positive for his or her business. ... It is uniformly negative for their business, at least in the eyes of finance chiefs."
McCullough noted that his networking group offers an online forum for more than 1,100 chief financial officers to discuss issues of importance to their business. He said there never has been a question that he can recall about government policy that has dominated discussion as much as the trade policy has recently. That discussion has included whether manufacturing is moving and strategies for dealing with tariffs. "It is top of mind, and they are not confident they will emerge from this unscathed," he said.
Nearly half of North American CFOs surveyed by CNBC said they are facing higher input costs, and more than one-quarter said they have increased prices to offset those costs. They were more likely than European or Asian counterparts to say they have experienced higher costs and passed on those costs to customers. And more likely to say they have moved operations to minimize the impact of tariffs, though that was less than 20% of CFO respondents. While U.S. CFOs indicated in the survey that they were not confident about increasing their capital spend, less than 10% said they had delayed or canceled projects because of trade policy.
Impact of trade tensions new new U.S. tariffs—CNBC Global CFO Survey Q3
The daily headlines can be tougher to measure. On Thursday alone, news broke that the U.S. and China were considering an interim trade deal, but a few minutes later a senior White House official told CNBC no such deal was in the works. President Donald Trump did agree to delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a "gesture of goodwill," and that move was matched by China, which said it would restart purchase of some U.S. agricultural products. Then later in the day, President Trump told reporters he would be open to an interim trade deal with China but would prefer a lasting deal. "It's something we would consider, I guess," Trump said.
The U.S. and China have agreed to meet again at the negotiating table in October, a plan that was reported after an early September phone call between Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
CFOs view of the trade war is not yet influencing their thinking about President Trump's reelection chances. The survey found the majority of CFOs of the belief that Trump will be reelected in 2020 and the U.S. economy will not slip into a recession next year.
Meanwhile, the trade uncertainty may be weighing on business investment, which declined in recent months to a three-year low, and has been cited by business trade groups as a reason trade deals need to be completed.
Fed chair Jerome Powell said on last Friday, "I think it is the case that uncertainty around trade policy is causing some companies to hold back now on investment. ... So for businesses, to particularly make longer-term investments in plants or equipment or software, they want some certainty that the demand will be there."
U.S. CFO responses to the third-quarter CNBC survey show they are hesitant to approve capital spending and hiring plans. The U.S. was the only of the three global regions surveyed — Europe and Asia are the other two — in which CFOs said it was more likely that both spending and headcount remain at the same level, rather than increasing, in the next year. Asia-Pacific was the only region where as many CFOs said they would decrease as increase spending.
"If the CFOs are correct — and on matters of their own company they usually are — this is really unfortunate," McCullough said. "We've witnessed several years of increased hiring and capital spending."
Capital spending over next 12 months—CNBC Global CFO Council Survey Q3
Hiring over the next 12 months—CNBC Global CFO Council Survey Q3