Deloitte's CFO Signals Survey: Large Companies Highly Optimistic About Ability to Ride out a Slow Recovery, but Persistent Unemployment is Fueling Increased Pessimism

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Nov 01, 2010, 11:20 ET

NEW YORK, Nov. 1, 2010 /PRNewswire/ -- North America's largest companies are expecting a slow economic recovery without a second recession, according to the Deloitte CFO Signals quarterly survey, which tracks the thinking and actions of chief financial officers representing many of North America's largest and most influential companies. Nearly 80 percent of CFOs at companies surveyed for Deloitte's third quarter CFO Signals survey also said that their companies are planning for a "U-shaped" recovery, with two-thirds expecting a wide-bottomed "U" or "bathtub-shaped" recovery. Only 9 percent expect a "W-shaped" or "double-dip" recovery.

Expected operating results are optimistic at 11 percent average year over year growth for revenues and 20 percent for earnings, but there is increasing variability across companies (median earnings are expected to improve only 10 percent). Although CFOs remain predominantly optimistic about their companies' prospects, the tide appears to be turning for a growing proportion of companies, according to the survey. Somber assessments of the business environment, driven largely by sharply-increasing concerns over persisting unemployment and its implications for consumer demand, are causing pessimism to rise faster than optimism.

"While expected operating results are fairly optimistic even when adjusted for high variability, it is important to note that many companies still have a long way to go before returning to their pre-recession trends," said Sanford Cockrell III, national managing partner of Deloitte's U.S. CFO Program. "At this point, you have to wonder if companies' projections are starting to lag their perceptions. If the employment picture does not improve and if general pessimism continues to rise, we would expect pessimism to start having a larger impact on companies' earnings and investment expectations."

The study also reported that 47 percent of CFOs are more optimistic about their companies' prospects than they were in the second quarter, down from the two-thirds of CFOs who were more optimistic in the second quarter than the first. The proportion of pessimists rose markedly with 36 percent less optimistic, up from 17 percent last quarter. Whereas optimism appears driven primarily by CFO confidence in their own company's capabilities, pessimism is driven primarily by external factors – the broader economy and general market conditions.

"Many companies appear to be adjusting their strategies and their operations for life in a slow-growth economy," said Greg Dickinson, director of Deloitte's CFO Signals survey. "In the absence of strong winds to sail, some are planning to lighten their loads and do the best they can, while others are planning to create their own wind through retrenchment, investment and both organic and inorganic growth. The different paths companies are pursuing may be reflective of their differing strength of cash flows and access to cash — which in turn may correlate strongly with company size."

The third quarter Deloitte CFO Signals survey also revealed the following (the estimates below are adjusted averages that have been trimmed to reduce the effect of outliers):

Government is still top-of-mind with social and environmental policy, regulation and health reform still topping economic and industry concerns (along with unemployment). Margins and maintaining demand are the top company-level concerns, consistent with strong industry-level concerns around pricing trends and market growth.
All surveyed industries (excluding public sector) project revenue and earnings growth. The average year over year projections for companies across all industries are 11 percent for revenues (as compared to 9 percent a quarter ago) and 20 percent for earnings (as compared to 17 percent a quarter ago).
Despite their positive business outlook, CFOs expect only modest increases in employment — even lower than expressed last quarter. Domestic hiring is expected to increase just 2 percent (down from the 3 percent projected last quarter) year over year, further fueling CFOs' own worries about persistent high unemployment within their own economies. Offshore hiring and outsourcing are also expected to level off with numbers of offshore staff rising 2.8 percent (versus 3.5 percent last quarter) and outsourced staffing rising just 1.4 percent (2.9 percent last quarter).
Less than one-third of the CFOs placed capital availability and cost in their top three economic concerns. Only one in 10 CFOs names sourcing capital a top three company challenge. Fewer than half of CFOs indicate they have debt-reduction strategies, and those who do expect to rely most heavily on cash reserves and operating cash flows (rather than asset sales and equity offerings).

"These attitudes are in stark contrast to smaller enterprises which are concerned about the difficulty in accessing capital currently and the impending 'debt wall' which will occur in the next few years," said Cockrell.

The Deloitte CFO Signals survey was conducted for the third quarter, 2010. Seventy percent of the CFO respondents are from companies with more than $1 billion in annual revenues; 75 percent are from publicly-traded companies. The findings were collected from 77 CFOs who responded to the survey during the last two weeks in August 2010.

Each forthcoming quarterly report will analyze CFOs' opinions in five areas: CFO career, finance organization, company, industry, and economy. For more information about CFO Signals, or to participate in the survey, please contact [email protected].

Deloitte's CFO Program harnesses the breadth of Deloitte's capabilities to deliver forward-thinking perspectives and fresh insights to help CFOs manage the complexities of their role, drive more value in their organization, and adapt to the changing strategic shifts in the market. For more information about Deloitte's CFO Program, please contact [email protected] or visit www.deloitte.com/us/cfocenter.

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.