CFOs feeling gloomier about economy in Q3

Nearly half of CFOs anticipate the North American economy will be in recession by next year, but they’re more concerned about inflation than a recession, according to a new survey by Deloitte.

The Big Four firm’s Q3 CFO Signals survey, released Monday, polled 112 CFOs in the U.S., Canada and Mexico, and found 46% of them expect the economy to be in a recession in 2023, compared to 39% who expect the economy to hit a period of stagflation, and 15% to grow with moderate inflation. However, nearly three-quarters of CFOs (73%) are more concerned about persistent inflation than a recession. 

Concerns about the economy and inflation have been increasing this year. “The first quarter of 2022 is when we really started to see the pressure on inflation begin to begin to mount and the subsequent moves by the Fed,” said Steve Gallucci, Deloitte’s North America leader of the CFO Program. “That, along with some geopolitical challenges both in China as well as in the Ukraine, have really dampened any of the optimism that we saw throughout the pandemic for the most part in terms of companies’ projected revenues, earnings, capital spending, etc.”

However, despite the worrisome economic conditions, a growing number of CFOs expect better conditions in a year, with 29% of CFOs expecting North America’s economy to be better in a year, up from 18% in 2Q22. The percentage of CFOs saying now is a good time for greater risk-taking rose to 38% from 35% in the second quarter of 2022.

“We did see some data points which would indicate that CFOs are beginning to look beyond what would be a pending recession towards potentially starting to think about taking more risk, potentially seeing the economy begin to perform a little bit better in the out quarters,” said Gallucci. “But they certainly continue to be cautious and prudent with things like headcount, operating expenses and the like.”

CFOs who anticipate the North American economy will be in a recession by 2023 are preparing by reducing or closely managing their companies’ operating expenses, controlling headcount, limiting hiring, boosting productivity, conserving or strengthening liquidity, and reprioritizing or deferring capital expenditures. They’re also modeling to test cash flows under different scenarios, managing pricing and contracts, reducing capital expenses, and trying to manage their customers and market share better. 

CFOs also have lower expectations for year-over-year growth for some key metrics. Revenue growth is expected to be 6.2% this quarter, down from 7.8% in the second quarter, while earnings growth expectations are at 6.4%, down from 8.4% in the second quarter, and capital spending growth at 4.3% is also down from 11.2% in Q2. 

Stock market volatility has contributed to overall uncertainty, as evidenced by the steep drop in the Dow last Friday. The proportion of CFOs who considered U.S. equities overvalued in this quarter’s survey fell to 30% from 43% in the prior quarter. “I guess in a strange way you’d say that less people thought it was overvalued today,” said Gallucci. 

Nearly half (46%) of the CFOs polled indicated U.S. equities were neither overvalued nor undervalued, while 24% viewed them as being undervalued. Thanks to the ongoing labor shortage, CFOs have also cut their growth expectations for domestic wages and salaries as well as domestic hiring to 4.8% and 2.6%, respectively, compared to 5.3% for both in Q2. 

CFOs have also been responding to concerns about climate change, including in last quarter’s surveys by Deloitte, in which they were asked about their decarbonization strategy. Their comments fell into key categories, such as clarity on measurement/strategy, costs, lack of universal guidance, technology/data capture, stakeholder buy-in, competing priorities, and resources.

“It was very much a mixed bag,” said Gallucci. “There were some that indicated that a third would get there by 2030 and a third by 2050, and about a third were still trying to figure it out.”