Political uncertainty continues to weigh on the confidence of companies and their CFOs with respect to hiring and spending plans according to the latest Duke University/CFO Global Business Outlook.
The survey of more than 1,200 CFOs and other finance executives provides a close to real-time snapshot of business plans for Q2 2016. Among the industries represented in the survey are retail/wholesale, mining/construction, manufacturing, transportation/energy, communications/media, technology, service/consulting and banking/finance/insurance.
Here are some key points from the recent CFO survey:
“Seventy-nine percent of U.S. CFOs believe that the United States economy faces moderate-to-large political risk. Political risk ranks higher in the U.S. than in Asia and Europe, though not as severe as in Africa and Latin America. The greatest sources of U.S. political risk stem from the upcoming elections, Washington dysfunction, and proposed regulations including the minimum wage.”
“Companies take a big pause in the face of severe political risk, delaying or scaling down business spending plans until the risk dissipates,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. “The current U.S. political situation is contributing to weak business spending plans of only 1 percent growth in the next year, not even keeping up with inflation.”
“Forty-seven percent of U.S. companies say they will pull back on spending or hiring due to concern about the political situation.”
“Nearly 40 percent of U.S. CFOs indicate that they believe that foreign businesses are less willing to do business with the U.S. due to political uncertainty.”
“The labor market continues to tighten in the U.S., making it difficult for many companies to hire and retain qualified employees, and contributing to wage pressures.”
“While the recent disappointing headline non-farm payrolls grabbed a lot of attention, our survey shows the aggregate numbers miss a crucial point. U.S. companies rate difficulty hiring and retaining skilled employees as their second biggest concern – while last year it ranked fifth,” said Fuqua professor Campbell R. Harvey, a founding director of the survey. “Business leaders plan to increase their workforce by 2 percent over the next year, which would reduce the unemployment rate to levels not seen since the late 1960s. CFOs are telling us that expected wage increases (3.3 percent) greatly outpace expected increases in product prices (1.5 percent).”
“The tight labor market, combined with a skills mismatch between what companies want and what they can get, makes wage inflation inevitable,” Harvey said. “This is exactly the type of data that will energize the Fed to be more aggressive in hiking interest rates – despite the recent setback in non-farm payrolls.”
“Seventy percent of U.S. companies say that cash balances have stayed the same or increased over the past year.”
“Forty-seven percent of companies indicate that they plan to hold on to their cash until economic uncertainty declines, or say that they need the cash as a buffer against possible liquidity shocks.”
“Among the 53 percent of firms that will begin to spend their cash, the top uses will be capital spending, paying down debt, and making acquisitions.”
“One of the more interesting findings is that most companies indicate that they have a very loose target for how much cash they hold, if they have any target at all,” said David W. Owens, editorial director for CFO Research. “This suggests that, within very wide bounds, companies accumulate cash when profits allow them to do so, using it as an internal source of funds to pay for future investment and business opportunities.”