CFOs concerned about health care costs, increasing competition

December 9, 2004

According to the findings of the December Duke University/CFO MagazineBusiness Outlook survey, which asked chief financial officers (CFOs) from a broad range of public and private companies about their economic projections, the number one risk to companies in 2005 is health care costs. Rounding out the top four risks are intense competition, fuel prices, and rising interest rates.

"Concerns about domestic terrorism have declined since last quarter, but our business terrorism index shows that the possibility of an attack is hurting business results," said Don Durfee, research editor of CFO Magazine. "We asked the CFOs to rank on a scale from 0 to 100 the negative impact that the threat of terrorism is having on their bottom line (where zero means no impact and 100 indicates maximum negative impact). While the terrorism index currently stands at 19.4, 36 percent of firms say the threat of terrorism is significantly affecting their bottom line."

After robust growth this fall, employment gains appear to have stalled. CFOs expect employment to grow only 0.8 percent in 2005, down from 3.1 percent predicted last quarter. Health care costs are expected to rise 8.4 percent.

Despite these concerns, the survey results indicate that the bottom line should fare moderately well next year, with earnings expected to increase by 11 percent. Moreover, just over half of the executives say they are more optimistic about the economy, and their firms, than they were last quarter.

"All of these numbers are down from last quarter, and other predictions are even less favorable," noted Graham. "Capital spending is expected to grow only at a replacement level of 3.8 percent, and tech spending will increase just 4.9 percent. Worse still, the CFOs say that advertising and marketing expenditures will rise by only 2.3 percent, which is less than half of the growth predicted in last quarter's survey.

"In addition, outsourced employment is expected to rise at more than half of the firms we surveyed, with the increase in outsourced employment expected to increase 4.3 percent. Finally CFOs are significantly less bullish than Wall Street about the prospects for economic growth: respondents forecast a GDP growth rate of 2.8 percent, compared with Wall Street's consensus forecast of 3.3 percent."

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