North American CFOs’ optimism falls sharply

Deloitte survey indicates the euphoria of the first quarter of 2018 has diminished, mainly because of concern about a lack of trade clarity.
By Neil Amato

In late 2017, more than half of CFOs from large North American companies were optimistic about the coming 12 months. Fast-forward a year, and more than half (55%) predict a recession by 2020.

While a strong majority (88%) viewed the North American economy as good in the fourth-quarter CFO Signals report from Deloitte, the finance chiefs are preparing for a potentially stormy future because of global issues such as trade policy, Brexit, and other concerns.

Projections for earnings growth and revenue are down from the previous quarter, and in the case of earnings, down to 7.3% from 10.3% two quarters earlier. Sanford A. Cockrell III, CPA, U.S. National Managing Partner and Global Leader of Deloitte’s CFO program, said that projected capital spending growth slowed markedly when compared with earlier in the year — from 11% in the first quarter of 2018, to 10.4% in the second quarter, 9.4% in the third, and 5% in the final quarter.

“That’s a critical leading indicator because it reflects a sentiment around willingness to spend, willingness to take risks,” Cockrell said. “That was a huge drop.”

Cockrell pointed out that the data reflect CFOs’ feelings from mid-November when the responses were gathered, and that sentiment could have changed along with other global financial events. For instance, the S&P 500 dropped 10.9% between Nov. 7, the first day respondents could complete the Deloitte survey, and the end of the year.

Optimism has dropped from the heights of the first quarter of 2018, a decline that mirrors a survey of US finance decision-makers from mainly private, midsize companies. The quarterly Business & Industry Economic Outlook Survey, conducted by the Association of International Certified Professional Accountants, shows that optimism is still strong, but it has dropped from post-recession highs.

The respondents in the Deloitte survey are mainly from large, U.S.-based multinationals. Their own-company outlook is clouded by how trade disputes will be resolved. Companies aren’t sure if they’ll need new suppliers or if their supply chains will need to be rerouted. “That really eroded a lot of this optimism,” Cockrell said, adding that trade issues remain the CFOs’ top external risk (talent is the top internal risk).

The two-year average for own-company net optimism is +37.8, yet it dropped to +3 in the most recent survey after reaching +53 in the first quarter of 2018 and +36 in the third quarter. In the survey, net optimism is the difference between those who say they are more optimistic than three months earlier to those who express less optimism than three months earlier. In the fourth quarter, 26% expressed rising optimism, and 23% expressed declining optimism. In the third quarter, optimists made up 48% of responses, and pessimists made up 12%.

In the first quarter, 59% of CFOs in the survey were optimistic, saying they expected the North American economy to be better in a year. In the most recent survey, just 28% expect the economy to be better in a year.

Trade angst and lingering issues such as Brexit and overall European growth prospects have caused the North American CFOs to take a dimmer view of the global economy. A year earlier, 33% said the European economy would improve in the coming 12 months. In the most recent survey, just 7% expected that to happen.

Regarding China, positive sentiment dropped from 41% a year earlier to 12% in the most recent survey.

Recession lessons from 2008

Cockrell said companies are better prepared for a potential recession than they were in 2008. CFOs are spending more time on scenario planning for such major events, and boards are asking more questions about such planning. The finance chiefs are focused on fortifying balance sheets in advance of “weathering the storm”.

“A lot of companies didn’t have a playbook [in 2008] for what would happen if you had a major recession,” Cockrell said. “It’s routine now for CFOs and financial teams making presentations to their boards — pretty much everybody is including some type of scenario that [includes a plan] for a recession. … It’s different than 2008, because everybody sees that cloud coming, and they’ve got time to prepare.”

Whereas 40% of CFOs a year ago said they would take on above-normal risk in pursuit of higher returns, just 23% said that would be the case for this year. “I wouldn’t say it’s battening down the hatches,” Cockrell said, “but they’ve really got a critical eye on the horizon.”

— Neil Amato ( is a JofA senior editor.

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