With the U.S. presidential election fading in the rearview mirror, the country’s CFOs are showing optimism about the economic road ahead. The latest Duke University/CFO Global Business Outlook survey, which drew responses from nearly 1,000 senior finance executives, found U.S. finance chiefs harboring high expectations for the regulatory and tax reform touted by President Donald Trump during his campaign. At the same time, many CFOs say that their companies will not take specific actions until the new administration’s plans come into sharper focus.
In the fourth quarter of 2016 (the survey ended on December 2), the Duke University/CFOGlobal Business Outlook optimism index for the U.S. soared above 66, its highest level in more than a decade. For the preceding five quarters—characterized by a consistently chaotic presidential campaign—the index measuring economic optimism had lingered near the long-term average of 60 (out of 100).
U.S. CFOs were slightly more optimistic about their own companies’ financial prospects in the year ahead. That optimism index rose to 67.4, registering a slight uptick from 65.3 in the previous quarter. Will the corporate tax rate really be reduced to 15%, as Trump has proposed? Which provisions of the Dodd-Frank Act will be repealed? As enthusiastic as CFOs may be about the installation of a pro-business commander-in-chief, in the absence of new policy few companies are tangibly changing their plans: Among survey-takers, 20% say that their hiring and spending plans have increased in anticipation of regulatory reform, and a lower proportion, 16%, say spending plans have increased to accommodate coming tax reform.
Interest rates are expected to continue rising throughout the coming year, with the Federal Reserve guiding toward three increases in 2017. While that might be expected to dampen optimism, senior finance executives have already factored those rate hikes into their expectations. In the survey, CFOs supporting the increases outnumber those opposed by a 2-to-1 margin. Given that the Fed has kept rates artificially low for a prolonged period—with nary a sign of inflation—CFOs don’t expect the incremental raises to have a material impact on borrowing costs. Overall, U.S. CFOs say they anticipate their interest expense to increase by fewer than 50 basis points in 2017.
While largely unconcerned about interest rates, though, some CFOs are saddled by burdensome debt loads and won’t have sufficient flexibility to increase spending. An economy that has exited the doldrums over the last five years, combined with a strong dollar and cheap oil, are among the reasons that U.S. manufacturing firms increased their borrowing as a percentage of assets by one-third—and two-thirds in the case of energy firms. More than 60% of companies in those industries say that high debt loads will now limit their future corporate investment.
Originally posted by CFO Magazine on February 7, 2017. For more info, visit the blog here.