Summary and context | All eyes on the next US administration
Last quarter, CFOs faced a barrage of domestic and global developments that led to decidedly mixed sentiment and expectations. On the one hand, uncertainty and challenges emerged related to Brexit, deflationary pressures in the eurozone, growth challenges in China, and a chaotic run-up to the US elections. On the other hand, equity, housing, and labor markets improved significantly, and several measures of consumer confidence indicated considerable strength. This quarter’s developments did little to offer a reprieve from volatility or uncertainty. Despite most pre-election indicators predicting little chance for Donald Trump to win the US presidency, he won the electoral college by a considerable margin. Moreover, the Republican Party maintained its majority in both houses of Congress, giving the president-elect a better chance of enacting his campaign promises. (This quarter’s survey opened the day after the election and closed two weeks later as Mr. Trump began to assemble his transition team and administration.) Meanwhile, many broader economic indicators have continued to improve. European and Chinese growth continued at fairly steady paces. Bond yields rose, consumer confidence remained high, retail sales were strong, equities hit new highs, and claims for unemployment insurance fell to their lowest level since 1973. So where does this leave CFOs’ sentiment and expectations as they look to 2017 and beyond? To get a post-election reading, this quarter we asked about their expectations for economic growth, government policy, industry performance, and company priorities. In short, surveyed CFOs seem to mostly expect the next administration and lawmakers to follow up on their campaign promises, particularly around taxes, infrastructure spending, health care, and trade policy (although they are mixed on the future of NAFTA).
Respondents still appear fairly bullish on North America’s economy and reserved on Europe’s and China’s. They are mostly optimistic regarding the US economy, mixed on Canada, and pessimistic on Mexico. Of particular note is that US CFOs now indicate higher optimism about their own companies’ prospects than they have in two years. Still, surveyed CFOs also indicate uncertainty and concern. Lack of clarity around government policy rose significantly this quarter, with respondents frequently mentioning two new themes among their most worrisome risks: “uncertain impact of the new US administration” and “impact of protectionism on global trade.” They say they expect gridlock in Washington to decline, but their mixed expectations for some policy areas seem to indicate inconsistent ideas about how the new administration will proceed. They also voice concerns about tradeoffs—for example, while they are optimistic that tax reform and infrastructure investments will happen, they also express concerns about tax uncertainty limiting near-term business investment and about the possibility of a rising national debt. When it comes to other quarterly tracking metrics, the news remains subdued. Year-over-year expectations for growth in revenue, earnings, investment, and domestic hiring are mostly lower than last quarter’s and at or below their two-year averages. Financial Services and Retail/Wholesale were particularly low, and US CFOs’ estimates for revenue, earnings, and capex all came in near their historic survey lows. Overall, CFOs’ sentiment shows considerable optimism despite growth expectations that remain relatively somber. It will be interesting to see how perceptions evolve as companies continue to consider the likelihood, degree, and implications of major policy changes that have been promised in many important areas.
Special topic: Post-election expectations | Macroeconomy in 2017
CFOs expect a better US economy, a strong dollar, rising interest rates and labor costs, and worsening conditions for Mexico. CFOs are about three times as likely to agree that the US economy will improve in 2017 as they are to disagree (58% of US CFOs agree). They are largely split on Canada’s economy (only 14% of Canadian CFOs say it will improve), and are overwhelmingly negative on Mexico’s (no Mexican CFOs expect improvement). The vast majority of CFOs expect labor costs to increase even though a minority expect productivity to improve. Less than half expect oil prices to increase, but 75% of Energy/Resources CFO expect an increase. CFOs are lukewarm on the prospects for domestic employment and consumer spending, and they are split on business spending. CFOs largely expect interest rates to rise above 0.5% before the end of 2017, but they are less likely to say rates will rise above 1.0% by the end of 2018. They are also split on the direction of US equity markets. CFOs foresee a continuing strong dollar with little expectation that other major currencies will appreciate against it. They overwhelmingly expect the Mexican peso to decline.
CFOs expect less congressional gridlock and generally anticipate the passage of significant changes to taxes, health care, trade, and immigration. CFOs overwhelmingly expect less gridlock and a realignment of political parties. CFOs expect corporate taxes to decline and repatriation of cash to become more attractive. They also expect substantial new infrastructure investments, and overwhelmingly expect the national debt to rise. Very few CFOs expect Congress to pass trade deals with either Europe or Asia. They are less consistent regarding their expectations for NAFTA. The overwhelming majority of CFOs expect the ACA to be significantly modified, although they are relatively unlikely to expect modifications that will slow the inflation of health care costs. Most CFOs expect meaningful immigration policy reform.
Expectations | Growth in key metrics, year-over-year
Key growth metrics remain near their survey lows. CFOs from the US and from the Financial Services and Retail/Wholesale industries weighed on the averages. Revenue growth expectations of 3.7% are down from last quarter and are again among the lowest in the survey’s history. US expectations are the second-lowest in survey history (back to 2Q10), and Financial Services sits at its new survey low. Earnings growth expectations of 6.4% are up slightly from last quarter, but still near their survey low. Healthcare/Pharma and Energy/Resources are the highest; Financial Services is lowest. Capital investment growth expectations of 3.6% are down sharply from last quarter and are the second-lowest in survey history. The US came in at its second-lowest level. Retail/Wholesale expects negative growth, with about half of CFOs expecting a decline. Domestic hiring growth fell from last quarter’s very strong showing of 2.3% to 1.3% and is slightly below its two-year average. Technology and Healthcare/Pharma are lowest.
CFOs are mostly optimistic about their industries’ growth and expect technology changes to be a major factor. But they also expect competition for sales and talent. Please see the appendix of the full report for substantial differences by industry. A majority of CFOs expect their industry’s revenue to grow, but a minority expect pricing to increase (implying they expect volumes to rise). Half expect their industry’s business models to change, and more than half expect technology advances to change both industry products/services and also how their industry operates. More than half of CFOs expect industry competition to intensify, but they are split on whether or not competition will come from other industries. Nearly half expect M&A deals to cause industry consolidation. The vast majority of CFOs expect industryskilled talent to be difficult to acquire and for wage increases to be necessary to secure and retain highly-skilled workers. They are split on whether or not technology will replace talent and whether or not wage increases will be required to secure/retain lower-skilled workers—with strong industry differences. Less than half of CFOs expect the regulatory environment to get better for their industry, but there are significant industry differences. For most industries, significant proportions of CFOs expect both improvement and worsening (perhaps indicating inconsistent expectations).
CFOs expect their range of products and services to expand and to hire more highly-skilled than lower-skilled workers; they expect few changes when it comes to capital and are mixed on staffing levels. CFOs are about twice as likely to say their companies will not take above-normal risk in pursuit of higher returns as they are to say they will. They are split on whether or not they will face pressure to increase board diversity, but they are mostly confident that they will not face pressure to shorten board member tenure. They overwhelmingly do not expect activist investors to impact strategic decisions. Well over half say their product/service scope will expand. CFOs are mostly split when it comes to focusing on new or existing customers and offerings (with strong industry dependency—please see the appendix of the full report). The same split applies when it comes to investing in intangible vs. hard assets, raising prices, and focusing on direct vs. overhead costs. CFOs are largely consistent in their expectations for capital, with relatively few expecting to repurchase shares, take on more debt, or hold more cash. CFOs are very likely to say they will hire more highly-skilled than lower-skilled workers, and they are split (largely along industry lines) on whether they will hire more people than they let go. Only four industries are net positive.
CFO Signals | Findings at a glance
Perceptions | How do you regard the current/future status of the North American, Chinese, and European economies? Perceptions of North America have improved, with 43% of CFOs rating its economic health as good and 58% expecting improvement next year. Perceptions of Europe remain pessimistic at just 8% and 13%, while China rebounded slightly to 24% and 17%. What is your perception of the capital markets? Seventy-nine percent of CFOs say debt financing is attractive (down from 89% last quarter), while attractiveness of equity financing held steady for public company CFOs (at about 40%) and rose for private company CFOs (from 24% to 29%). Seventy percent of CFOs say US equities are overvalued—just under the survey high.
Sentiment | Overall, what risks worry you the most? CFOs again mention global economic growth and government regulation. New for this quarter is uncertainly regarding the new US administration’s future actions, with CFOs voicing concerns about the possibility of protectionism hurting global trade, and about tax reform possibly slowing near-term business spending. Compared to three months ago, how do you feel now about the financial prospects for your company? This quarter’s net optimism rose from last quarter’s +19.7 to +23.4 (slightly above the two-year average). Forty-three percent of CFOs express rising optimism (up from 35%), and the proportion citing declining optimism rose from 16% to 20%.
Expectations | What is your company’s business focus for the next year? CFOs indicate a bias toward revenue growth over cost reduction (45% vs. 31%), and investing cash over returning it (56% vs. 17%). CFOs again indicate a bias toward existing offerings over new ones (41% vs. 32%), current geographies over new ones (57% vs. 22%), and organic growth over inorganic (58% vs. 18%). Compared to the past 12 months, how do you expect your key operating metrics to change over the next 12 months? Revenue growth expectations fell from 4.2% to 3.7% and are near their survey lows. Earnings growth rose to 6.4%, above last quarter’s 6.1% but again near 1Q16’s survey-low 6.0%. Capital spending growth fell to 3.6% (well off the two-year average). Domestic hiring growth fell to 1.3% from 2.3%.
Special topic: Post-election expectations | What are your expectations for the macroeconomic environment in 2017? By about a 3-to-1 margin, CFOs expect the US economy to improve in 2017; they are split on Canada’s economy and overwhelmingly negative on Mexico’s. They are lukewarm on prospects for domestic employment and consumer spending, and split on business spending. They largely expect interest rates to rise above 0.5% in 2017, but they are less likely to say rates will rise above 1.0% by the end of 2018. They foresee a continuing strong dollar and overwhelmingly expect the Mexican peso to decline.
What are your expectations for US government policy over the next four years? CFOs expect less congressional gridlock and generally anticipate the passage of significant changes to tax rates, health care, trade, infrastructure spending, and immigration. They overwhelmingly expect the national debt to rise. Very few expect Congress to pass trade deals with either Europe or Asia, and they have mixed expectations for NAFTA.
What are your expectations for your industry in 2017? | CFOs are mostly optimistic about their industries’ growth and expect technology changes to be a major factor. They expect rising competition for sales and for highly-skilled talent, and they are mixed on their expectations for regulation—perhaps indicating inconsistent understanding of where policy is headed in some areas. Predictably, expectations vary considerably by industry (please see the appendix of the full-detail report).
What are your expectations for your company in 2017? | CFOs mostly say their companies are not likely to take above-normal risk in pursuit of higher returns, and most say they are not facing substantial pressures around board composition or activist investors. They are largely consistent in their expectations for capital, with relatively few expecting to repurchase shares, take on more debt, or hold more cash. They expect to hire more highly-skilled than lower skilled workers and they are split (largely along industry lines) on whether they will hire more people than they let go.