In a sign of a weak foundation for the economy and stock market, corporate financial officers told surveyors earlier this month that they are less optimistic about their own companies than they were three months ago. They said they are still holding back on normal capital spending and hiring. “Confidence is not there. They are being very cautious in what they do,” says Marie Hollein, chief executive and president of Financial Executives International, an association of CFOs and controllers, which conducted the survey in the first week of June with Baruch College’s Zicklin School of Business and released it June 23.
This glum takeaway from the FEI/Baruch survey would seem to contradict headlines that came out of a survey conducted in late May by Duke University and CFO magazine. “CFOs Feeling More Upbeat” is the headline on a post about that survey on BusinessWeek’s “Case for Optimism” blog, for example. But the actual findings of the two surveys are remarkably consistent even though these top-line summaries are not.
Both surveys found CFOs are more upbeat about the outlook for the economy even as they shrink their own companies. The Duke survey, like the FEI survey, found companies expect to continue cutting capital spending and employment. The most significant difference is that the Duke survey found CFOs a bit less downbeat about their own companies than they were last quarter when that survey’s index plunged to new low. The professors running the Duke survey said CFOs are “hoping for the best; planning for the worst.”
The Duke survey also found CFOs of public companies predicting that their earnings will decline. That could come as shock to the stock market which surged this spring in anticipation of big earnings rebound.
A third survey, this one of CEOs by the Business Roundtable, also found many companies facing continued declines in sales, capital spending and employment. The numbers were less grim than last quarter, but they still pointed to contracting companies even as the executives were becoming a lot more optimistic about the economy.
What should you make of the executives’ smiles about the economy alongside frowns about their own companies? An optimist might say that executives’ improving confidence in the economy is the first step toward companies taking more chances on capital investments and hiring. A pessimist might say that the grim capital spending and employment actions the executives report will keep their hopes for the economy from becoming reality.
But rather than just deciding to be optimistic or pessimistic, step back and think about what you already know about the economy and about companies after the credit bust. You know that the Federal Reserve and the U.S. Treasury stopped the meltdown in the financial markets and made clear that they won’t allow big banks to fail. Their actions brought relief that there won’t be another depression. Not facing Armageddon is reason enough for CFOs to be more confident about the economy. But you also know that a lot of companies, and a lot of their customers, still carry heavy debt loads that they took on when borrowing was easy. Those debts are reason for the CFO’s companies to keep holding back on capital investments and hiring. In short, the government bailouts saved banks and a couple of automakers but didn’t erase debts and fix other sick companies.
With time, probably a lot of time, those debts will be paid down or restructured. Then the CFOs’ companies will be able to act on confidence they have in the economy. But for now, there’s less reward for choosing between optimism and pessimism than there is for finding the will to be patient.