CFOs' worry at five-year high

Almost half more pessimistic

Lower oil prices aren't easing top financial executives' concerns about the nation's economy.

Pessimism is at its highest level in five years among chief financial officers, who think there's a one-in-three chance the U.S. economy will fall into recession within the next year.

That's according to the quarterly Duke University/CFO Magazine Business Outlook survey, which polled 571 CFOs at U.S. public and private companies between Aug. 29 and Sunday.

Nearly half of the executives surveyed said they were more pessimistic about the economy than they were last quarter. Their top concern was weak consumer demand, followed by rising labor expenses and higher fuel costs.

CFOs fear that demand for their products is slackening, even as their costs increase, said John Graham, the Duke finance professor who leads the survey. CFOs reported that their companies have sliced capital spending plans by about one-third, and 29 percent said that if consumer demand lessens, they'll cut spending even more.

"Six months ago, consumers were weaker but corporations looked like they were going to pick up the slack," he said. "That's not what we're hearing now. Now they're saying, 'If consumers are weak, we're not going to carry it.' "

His team has found a strong relationship between CFOs' past optimism levels and corporate America's subsequent capital spending, hiring and earnings. CFOs manage their companies' fiscal health and help develop strategy, partly by making predictions about future trends.

"The CFO is the one writing the checks," Graham said. "I think they have a finger on the pulse of what's going on in the U.S. economy."

Although forecasting a recession might be going too far, he said, "I'm definitely predicting a slowing economy -- I don't mind stating that very solidly," he said.

Although the nation's economic signals have been mixed, they've generally been in the direction of slower growth. The economy grew faster than expected in the second quarter, but the pace was still less than earlier in the year. Unemployment is down, but so are consumer confidence and sales of new and existing homes.

The CFOs' pessimism also is hitting closer to home. Although CFOs expect their companies' earnings to increase over the next year, the amount of the increase has dropped from 10.4 percent last quarter to 9.4 percent. It's the first time in years that Graham has seen the executives predict less than a double-digit increase.

Companies expect to increase their domestic hiring by 0.8 percent over the next year, a smaller amount than predicted last quarter, 1.3 percent. If consumer demand drops, 34 percent of CFOs said they would cut their hiring further.

Oil prices don't top the list, but they are one of the factors influencing companies' concerns about consumer demand, Graham said. Oil prices fell about 5 percent during the survey period, but CFOs' concern about fuel costs remained the same.

At best, the economy will remain steady over the next 18 months, said Thomas Staab, CFO of Inspire Pharmaceuticals, a Durham drug development company working on treatments for eye diseases and other ailments.

The economy "is in a tenuous state right now," and oil prices, possible terrorist activity and political events could move it dramatically, he said. At the same time, he predicts that politicians will try to make the nation's economic picture as rosy as possible for the upcoming elections.

"I think that we're sort of in a honeymoon period, in that the next six to 12 months are going to be as good as we can possibly make it -- excluding some of the dark factors," Staab said.

Harold Parker, CFO of Durham's Cardinal State Bank, is not as concerned about the Triangle's economy as he is the national picture. The bank recently opened its fourth branch in Hillsborough and plans to construct a new building and hire new employees for it next year.

The Triangle has always been somewhat insulated from national troubles, he said. The region's unemployment rate for July was 3.7 percent, compared with 4.8 percent across the state and nationally.

"I think things are still vibrant and alive here," Parker said.