Why CFOs Expect a Recession In 12 Months

Even as the Federal Reserve cuts interest rates to bolster the slowing economy, chief financial officers (CFOs) at many of America's biggest companies are ringing alarm bells, according to the latest release of the CFO Global Business Outlook survey conducted quarterly by Duke University. "More than half (53%) of US CFOs believe that the US will be in recession by the 3rd quarter of 2020 and 67% believe that a recession will have begun by the end of 2020," according the survey's authors.

The Fed announced Wednesday that it will cut rates for the second time this year.

The Duke survey's results show a startling shift from optimism to pessimism about the U.S. economy over the course of the past 12 months. The percentage of CFOs who are "more optimistic" about the economy plunged from 43.6% a year ago to 11.8% today, and the percentage CFOs who are "less optimistic" jumped from 23.0% to 55.2%. "Economic uncertainty is a top CFO concern," the report says.

Key Takeaways

  • Corporate CFOs are increasingly bearish on the economy.
  • A large majority expect a recession to be underway by the end of 2020.
  • A significant number of CFOs find low interest rates to be detrimental.
  • Corporate profits peaked in 2014, per U.S. government statistics.
  • Weakening profits are another recessionary signal.

Significance For Investors

The CFOs also are markedly more downbeat today about the prospects for their own companies than a year ago. The percentage of those saying that they are more optimistic has dropped from 48.6% to 32.4%, while the percentage expressing less optimism has jumped from 21.4% to 36.0%.

Worries about hiring and retaining qualified employees has been the top worry of CFOs for several years. Now it's in second place, behind economic uncertainty. Nonetheless, CFOs in a wide range of industries are reporting labor shortages across a spectrum of skilled job categories, including: engineering, information technology, software programming, sales, machine operators, mechanics, and technicians (including medical technicians). Even drivers are in short supply.

Meanwhile, 36% of CFOs see negative impacts from persistently low interest rates, which means that more rate cuts by the Fed are likely to be a cause for yet more pessimism. These negative effects include: low investor returns, increased corporate debt issuance, and high present values of liabilities resulting from low discount rates.

David Rosenberg, chief economist and strategist at wealth management firm Gluskin Sheff, shares these concerns. "Recessionary pressures in the economy are building," he said in a detailed interview with Business Insider. Like CFOs, he said the impact of the trade war on global economic growth and supply chains has been "an unprecedented period of economic and political uncertainty."

Rosenberg adds that rising oil prices after the recent attack on Saudi oil facilities, and the specter of more attacks and supply disruptions, are another source of danger. "The only glue holding the economy together has been the consumer," Rosenberg said. "This also is going to be a de facto tax increase for the consumer," he added.

Looking Ahead

Albert Edwards, the co-head of global strategy at Societe Generale and known as the "perma bear," argues that corporate profits have been drastically weaker than they appear for the past several years, thus making a recession "imminent," per another BI report. According to National Income and Product Accounts (NIPA) data assembled by the U.S. Bureau of Economic Analysis (BEA), corporate profits actually peaked back in late 2014, Edwards observes. So in contrast to the soaring stock market's measure of corporate earnings, the NIPA data show that profits "have essentially flatlined for the last few years," Edwards wrote.

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