CFO Optimism Falls In May Amid Rising Inflation Concerns

StrategicCFO360’s latest poll of U.S. CFOs shows that the specter of rising interest rates and inflation have impeded their confidence—and their predictions for investments.

After a record-breaking month in April, CFO confidence has taken a hit this month, down 6 percent from where it was just four weeks earlier. Those who are more optimistic say they’re hopeful the distribution of vaccines worldwide, the rollback of mask and distancing mandates and the release of pent-up consumer demand will fuel the economy well into 2022—and beyond. Respondents adopting a more cautionary stance are concerned that stimulus packages and the Biden administration’s policies will cause inflation to go up, thus increasing the costs of labor, raw materials and doing business in general.

Those are the key findings from StrategicCFO360’s May reading of CFO confidence, conducted among 198 senior finance executives between May 17 and 20. America’s finance chiefs say they’re expecting a recovery in the business environment 12 months from now, although their confidence declined this month to 7.2 out of 10, according to our 10-point scale, from their record-breaking rating of 7.7/10 in April. And they’re not alone in this view: CEOs’ forecasts also dropped this month, when polled by our sister publication Chief Executive, two weeks prior, to a 7.2/10 from May 4-6.

CFO ratings of current business conditions also took a hit this month, down 6 percent from the month prior, to 6.7/10 in May from 7.1/10 in April. In comparison, CEO ratings of current business conditions have held steady at 7/10 for the past two months.

“We are seeing a lot of stimulus being spent. It is driving inflation, and the increased costs of products and services will ultimately become an impediment to the economy growing,” says Chris Horner, CFO of J&M Tank Lines, a Birmingham, Alabama-based mid-size transportation company. He forecasts that business conditions 12 months from now will be a 5/10, down from his 10/10 rating of current conditions.

There are still many CFOs who maintain confidence that business conditions will improve due to global potential.

Transocean CFO Mark May says he’s highly confident of both current and future business conditions, rating them an 8 and 9 out of 10, respectively. He believes that there will be “increased consumer confidence as global economies open.”

Similarly, Basil Marais, CFO of Georgia-based Applied Software, says “improving sentiment and sustained macroeconomic stability” is what fuels his optimism for the future, from a 6 out of 10 when looking at the current climate to a 7 out of 10 for conditions 12 months from now.

Nevertheless, an increasing proportion of CFOs (45 percent in May vs. 35 percent in April) are forecasting that business conditions will either worsen or remain unchanged by this time next year. Those forecasting improving conditions dropped from 67 percent in April to a slight majority of 55 percent in May.

Forecasting for the Year Ahead

CFOs’ projections for revenue, profits and capital expenditures all took a hit this month, to varying degrees. While almost two-thirds (62 percent) of CEOs have increasing capex forecasts, CFOs are much less enthusiastic: only 50 percent are forecasting an increase in capex over the next 12 months, down 24 percent since last month.

David Dreyer, CFO of publicly traded AMN Healthcare, believes that business conditions will worsen, from an 8/10 to a 6/10 by May 2022, and therefore plans to keep capital expenditures steady for his company because “tax rates and interest rates will likely go up under the Biden administration,” he says.

Many other CFOs predict a rise in interest rates that will lead to an increase in the cost of debt, which would discourage expenditures—especially after the historically low rates set by the Fed to encourage business investments during the peaks of the Covid-19 crisis.

Aside from the drop in CEOs who expect an increase in capital expenditures, those predicting increases in profits, revenue and hiring all increased this month. But CFOs retracted their confidence on all measures. Twenty percent fewer CFOs than CEOs expect capital expenditures to increase, the widest gap measured since the index began fielding.

Revenue forecasts also diverged this month: the 88 percent of CEOs who forecast increases in revenue is 6 percent more than the 83 percent who forecasted the same in April. Seven percent fewer CFOs are predicting an increase now than in April, at 81 percent this month.

Profit forecasts remained stable for both CEOs and CFOs in May, with 80 and 71 percent projecting increases in the year ahead, respectively.

Similarly, 68 percent of CEOs, up 3 percent since April, and 66 percent of CFOs, unchanged since April, are now forecasting increases in hiring by this time next year.

 

Sector View

Confidence in future business conditions is down for CFOs across most sectors this month. Data show the largest decline in optimism in the financial services sector, down 20 percent, although CFOs in healthcare and consumer manufacturing also lost confidence, with their forecasts dropping 15 and 13 percent, respectively.

The CFO and president of a large financial services company says, “Tax increases, an unfriendly political environment for private companies, continued social unrest with a lack of leadership, and the weakening U.S. dollar” are the main reasons why his rating of future conditions is a 5/10, down from an 8/10 rating for current conditions.

Donald Selheimer, CFO of the Trezevant Manor, a Memphis, Tennessee, LifeCare community, echoes many CFOs who have become more cautious in their outlook: “Large inflationary increase, pressure to increase interest rates, overinflated real estate sector and stock market, and lackluster growth in jobs,” he says are reasons for his “weak” rating of future business conditions, at 4/10.

However, one sector did experience an increase in confidence: professional services. The rating of CFOs in that industry increased by 2 percent in May vs April. A CFO at a mid-size New York-based company in the sector says, “Reopening will drive the growth plus the current investment in infrastructure will create jobs.”

Many other CFOs agree that demand and the reopening of business will drive their sales—although concerns over other aspects of the economy are driving down overall optimism.

Size View

Confidence in future business conditions has declined across all company sizes, with the largest decrease in CFOs at companies with less than $10 million in annual revenue. Their confidence decreased by 12 percent since last month, with many citing potential tax increases and unfriendly business policy as reasons why.

Those in companies with $1 billion+ in revenue only saw a 1 percent drop in their overall forecast. They, too, are concerned over inflation and unfriendly policies in Washington but are encouraged by a reopening of the economy on a global scale and improved sales pipelines.

State View

CFO ratings state by state vary, between Wisconsin, whose CFOs are the most confident, rating future conditions an 8/10, and Indiana, whose CFOs are the least confident of the bunch, rating future business conditions a 6/10.

CFOs at companies in Wisconsin, Delaware and Minnesota, who top the list for their rankings of current conditions, say that the re-opening of businesses, new revenue streams, organic business growth and the shrinking impact of Covid-19 are the reasons for their enthusiasm.

Indiana, Massachusetts and Virginia house the most cautious CFOs of the bunch; they are wary that conditions will further improve, especially when the government stimulus stops. One CFO from a mid-size manufacturing company in Indiana sums up the concerns of many CFOs from these lesser-confident states: “Proposed tax increases on businesses and individuals will decrease the strength of the economy.  The additional unemployment benefits are already making it hard to get workers and I’m not sure that a change is coming soon.” Many also shared that it is becoming increasingly difficult to find talent.

About the CFO Confidence Index

The CFO Confidence Index is a new monthly survey of CFOs and finance chiefs on their perspective of the economy and how policies and current events are affecting their companies and strategies. Every month, StrategicCFO360 surveys hundreds of CEOs across America, at organizations of all types and sizes, to compile our CFO Confidence Index data. The Index tracks confidence in current and future business environments, as well as their forecast for their company’s revenue, profit, capex and cash/debt ratio for the year ahead. Learn more at StrategicCFO360.com/CFO-Confidence-Index

 

 

 


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