It’s been a discouraging economic day, if by that you include faster increases on interest rates and falling GDP growth. But the estimated zero expansion of GDP in the second quarter of 2022 so far and the 75-basis point addition to the Fed’s benchmark interest rate—which now looks to end the year at 3.4%—is new. What’s been developing is greater pessimism on the part of corporate CFOs, according to a new Deloitte survey for the second quarter.
“CFOs’ views of regional economies one year out decidedly took a downturn,” the report read. That was certainly true in North America. “Just 18% indicate they expect North America’s economy to be better a year from now, down from 36% in the prior quarter.”
The survey was of 97 CFOs, 89% from the US, 8% from Canada, and Mexico making up the final 3%. A fifth of companies represented had annual revenues below $1 billion. Another 42% were from $1 billion to $5 billion, 14% from $5 billion to $10 billion, and 24% larger than $10 billion.
Heaviest industry representations were in manufacturing, retail and wholesale, financial services, and general services. Others included energy; healthcare and pharma; technology; and telecom, media, and entertainment.
While 52% of the CFOs saw the current North American economy as good, that’s down from 64% in the first quarter. The own-company optimism index fell from +21 in the first quarter to -11 in the second.
“CFOs revealed mixed views of the capital markets,” the report said. “Less than half (43%) of CFOs considered US equity markets as overvalued this quarter, compared to 72% in 1Q22. For 32% of CFOs, debt financing was attractive, down significantly from 85% in the 1Q22 survey. Less than one-quarter (22%) of CFOs regarded equity financing as attractive, down from 37% in 1Q22.” According to the report, the attractiveness of both debt and equity financing “fell significantly” in the context of the Fed announcing a half percentage point interest rate increase two days after the survey opened. With the additional three-quarters of a percentage point increase today, it would be interesting to see their responses.
And, importantly, many CFOs were off on risks. Only 35% thought it was a good time to take greater risks now, down from 47% in the first quarter.
While the survey didn’t specifically discuss real estate plans, there are a number of reasonable inferences. CFOs are more pessimistic, much less likely to think current risk as a good idea and are sour on financing at the moment. Barely half think the current economic climate in North America is good. All this together indicates risk aversion, which means lower likelihood to expand, invest in additional facilities, and a greater inclination to reduce expenses, which in part would suggest more negotiation to avoid additional spending on property and leases.