The Duke-CFO Survey was released today and the news is grim.

One of the big challenges is to reconcile the growth in confidence against the hard data. Consumers as well as CFOs are more confident. However, our survey shows that this confidence is not influencing business plans. CFOs are playing a cautious, wait and see game, before pulling the trigger on new capital spending and employment growth.

Reconciling Hard vs. Soft Data

In examining the data, consider three factors:

1. Bottomming Out? CFO confidence graph shows that optimism is up but still lower than any other point historically (except the last quarter). It is like saying that housing sales increased by 10% – that is good but a 10% increase on a very low level doesn’t do much for economic growth.
2. Sustained vs. fleeting. I think people are grasping for some good news. There is talk of green shoots. However, there is very little fundamental data to support a recovery at this point. It is somewhat easy to feel a little more optimistic. It is a different matter to translate that into corporate plans. That is why I emphasize the idea of “sustained” optimism. Optimism will only translate into corporate action after CFOs are confident that the recent news is not fleeting. They will not change their corporate plans until there is evidence of a sustained recovery. Of course, there is a chicken and egg problem that results from this!
3. This crisis is different. I think CFOs are feeling more optimistic but given the gravity of the crisis – it is dangerous to extrapolate from previous recessions/recoveries. This is another reason to be cautious.

The Press Release

The press release is found here. Here is an excerpt from the draft release:

For the second consecutive quarter, there has been an increase in optimism. In the latest survey, 54% of respondents are more optimistic about US economic prospects. However, these numbers need to be tempered because the overall level of optimism is still low.

"Our survey carries an important message: don’t put too much weight on the ‘soft’ data like consumer confidence, which has been overemphasized in the news. Recovery requires sustained confidence, and such confidence is forged by stronger economic fundamentals," said Campbell Harvey, founding director of the survey. "The economic fundamentals are still fundamentally troubling. There is no thaw yet in this winter of hardship."

One example of hard data is the surveyed companies’ employment plans. Employment is projected to decrease by 5.6% over the next 12 months. This is essentially unchanged from last quarter’s projection of a 5.7% reduction.

"Approximately 109 million people are employed in the private sector. A drop of 5.6% means the loss of 6.1 million jobs. Presumably, government programs will offset some of these losses, but even the most optimistic government forecasts would reduce the losses by only two million. We’re facing a staggering four million additional job losses," said Harvey.

Since the recession began, 5.7 million jobs have been lost and the unemployment rate is 8.9%. The Congressional Budget Office assumes an unemployment rate of 8.8% in 2009 and 9% in 2010. "CFOs know their companies’ employment plans. Slashing employment by 5.6% means unemployment in the 11-12% range. Our survey evidence renders the CBO projections completely unrealistic," said Harvey.

Full results of the survey.

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