Many believe a related effect of the global credit crisis to be the decision by the Federal Reserve's Open Market Committee (FOMC) last month to lower the federal funds rate 50 basis points to 4.75%. Nearly 80 percent of those CFOs surveyed agreed with the Fed's decision, and the majority (62 percent) does not anticipate the cut to impact their company's current borrowing position. While respondents do expect the federal funds rate to continue to be lowered over the next twelve months, the mean expectation by CFOs for the Federal Funds rate in September 2008 is only slightly lower at 4.50%.
"We are experiencing a challenging market environment characterized by uncertainty and turbulence around interest rates and credit markets, the value of the dollar, and employment and therefore, increasing anxiety about recession and/or inflation," said John Elliott, Dean of the Zicklin School of Business at Baruch College. "With economic confidence at a three-year low, CFOs face real and perceived challenges in coming quarters."
Economic Optimism Drops
The CFO Optimism Index for the U.S. economy, which was 62.85 for this quarter, dropped 4.4 points from last quarter, reaching a three-year low. This quarter, 56 percent of the CFOs are more concerned about recession than last quarter, while over one-third (34 percent) report being more concerned than they were last quarter about inflation over the next twelve months.
CFOs' outlook toward their own companies also decreased this quarter, as the Optimism Index of CFOs' own companies sank to 71.68, the lowest level in 39 months.
"The ripple effect from the sub-prime mortgage meltdown is undoubtedly being felt by both companies and investors in the global marketplace," said Michael P. Cangemi, FEI President and CEO. "We have left behind a period of easy credit, apparently too easy, which led to excesses. The challenge for the Fed is to manage a balance."
Additional Data: CFOs Give Cox a "B" Rating
Overall, American CFOs view Christopher Cox's performance as satisfactory. When asked to rate his performance to date as chairman of the Securities & Exchange Commission, over 50 percent (52.2%) issue him a B grade for his overall performance while another 41 percent give him a C rating. When asked about specific issues, such as Sarbanes-Oxley or markets competitiveness, a strong majority of CFO respondents neither strongly approve nor strongly disapprove of Cox's performance, instead falling somewhere in between on the approval/disapproval spectrum.
Lower Bonuses Expected
On average, responding CFOs anticipate year-end bonuses to decrease by over three percent (mean) compared with those issued in 2006. By industry, CFOs in retail wholesale businesses anticipated the largest drop by thirteen percent.
Big Four Firms Seen as Too Expensive
Almost 80 percent of the companies surveyed reported purchasing services from non-Big Four audit firms. Of that 80 percent, the majority purchase tax (74 percent) and auditing (68 percent) services. Some of the specific reasons listed for using these alternative audit firms are that the Big Four firms are no longer interested in this type of audit work or that their prices are too expensive.
Companies Expect Greater Price Increase
CFOs plan to increase product prices at their own companies 2.30% in the next 12 months compared to 1.85% last quarter and 2.07% in the first quarter of 2007. Companies expected a price increase of 2.53% in the third quarter of 2006.
