Deloitte: CFOs Anticipating a Slowdown, But Not a Recession

Forecasting

Deloitte today released the results of its CFO Signals survey for Q1 2019, which tracks the thinking and actions of CFOs who work for North America’s largest and most influential companies on a quarterly basis. Since 2010, the report has provided insights into the business environment, company priorities and expectations, finance priorities, and CFOs’ personal priorities.

The latest survey shows that CFOs overwhelmingly expect a U.S. downturn by the end of 2020, with a slowdown seen as much more likely than a recession. Their expectations for growth in revenue, earnings, hiring, and wages declined, with only capital expenditure rising.

“This quarter, nearly three-fourths of respondents said they expect a deceleration of U.S. economic activity by the end of 2020, but only 15 percent expect an actual recession—meaning an extended decline in activity,” said Sanford Cockrell III, U.S. national managing partner and global leader, CFO Program, Deloitte LLP. “While a slowdown is certainly better than a recession, CFOs’ own-company optimism remains at one of its lowest levels in the last three years.”

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Assessments of Regional Economies

CFOs’ perceptions of North America declined, with 80 percent rating current conditions as good (down from 88 percent) and 28 percent expecting better conditions in a year (same as last quarter). Perceptions of Europe declined, with 16 percent noting current conditions as good and 8 percent expecting better conditions in a year. Their views of China’s economy slid, with 20 percent indicating current conditions are good and 16 percent expecting better conditions in a year.

Planning for a Downturn

Nearly 85 percent of CFOs said they expect a U.S. downturn by the end of 2020, and they overwhelmingly expect a slowdown rather than a recession. Those expecting a downturn were most likely to cite U.S. trade policy, business and credit cycles, and the impacts of slowing growth in China and Europe on the U.S. economy. A minority indicated they have detailed defensive or opportunistic plans; most CFOs expect to take defensive actions, including reducing discretionary spending and limiting or reducing headcount.

CFOs indicated a bias toward revenue growth over cost reduction (51 percent versus 25 percent), investing cash over returning it (46 percent versus 19 percent), current offerings over new ones (40 percent versus 36 percent), and current geographies over new ones (64 percent versus 12 percent).

Growth Expectations

CFOs’ expectations for year-over-year revenue growth fell from 5.5 percent to 4.8 percent; their expectations for earnings growth slid from 7.3 percent to 7.1 percent; capital spending rose from 5 percent to 5.9 percent; and plans for hiring fell from 3.2 percent to 2.1 percent—all below their two-year averages. Their expectations for dividend growth declined from 4.5 percent to 3.9 percent, the lowest level since the fourth quarter of 2017.

However, the net optimism index for CFOs sentiment on their own companies rebounded from last quarter’s +3 to +16—better, but still the third-lowest level in three years. Thirty-two percent of CFOs expressed rising optimism (26 percent last quarter), and 16 percent declining optimism (23 percent last quarter).

Internal vs. External Risks

CFOs voiced even stronger concerns about trade policy (especially U.S.-China policy) and continuing concerns about economic risks/slowdown and U.S. political turmoil. For internal risks, CFOs again expressed strong concerns related to talent and strategy execution. Other concerns such as achieving growth and managing costs continued to increase, as did worries related to adaptation, change, prioritization, and overload.

Diversity and Inclusion Strategy

The majority of CFOs cited a formal diversity and inclusion (D&I) strategy. About half said the strategy is known throughout their company and embedded in their talent brand. Eight of the nine D&I tactics—such as including diversity metrics in internal reporting, providing training around unconscious bias, assigning D&I responsibility to a senior leader, and issuing companywide principles for D&I—were selected by at least 40 percent of CFOs. Implementation of flexible work arrangements was the most-selected tactic.

“While two-thirds of CFOs said their organization has a formal D&I strategy, only 53 percent state that this is known throughout their company,” said Terri Cooper, national chief inclusion officer, Deloitte LLP. “This is an opportunity for organizations to not only develop a D&I strategy, but ensure that everyone in their organization is aware, engaged, and views it as a fundamental value in their culture.”

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