CFO optimism rises on outlook for 2024 economy: Fed

Dive Brief:

CFO optimism has brightened on an improved view of business prospects and greater confidence that the economy in 2024 will disprove forecasts of a recession, the Federal Reserve Banks of Richmond and Atlanta found in a survey.
Top financial executives on average believe gross domestic product will grow 1.7% this year, a marked upgrade from their 1.3% forecast in August, the Fed regional banks found in a survey of 400 CFOs conducted with Duke University’s Fuqua School of Business.
“The probability that firms assigned to a decline in economic activity has fallen considerably since the beginning of” last year, Sonya Ravindranath Waddell, vice president at the Richmond Fed, said in a statement.

Dive Insight:

CFO expectations align with those of private and public sector economists who believe growth during last quarter slowed from the robust 5.2% pace in Q3. Many analysts predict the Fed will achieve a “soft landing,” holding borrowing costs high enough to cool demand and slow inflation while avoiding a downturn and widespread unemployment.

“We think the odds of a recession are still relatively low in 2024,” Ed Yardeni, president of Yardeni Research, said Sunday in a research note to clients.

At the same time, Yardeni recently raised the odds of a 2024 recession to 35% from 30% in October because of the risk of a widening Israel-Hamas war. GDP will likely expand 2% this year, he said.

Bolstering forecasts of slower but sustained growth, the Atlanta Fed said Tuesday that GDP likely rose at a 2% annual rate in Q4, a downgrade from its 2.3% prediction on Dec. 23.

While optimistic that the expansion will persist, CFOs see risks to their outlook from monetary policy and the challenging quality and availability of labor, according to the Fed and Fuqua School survey.

Fed tightening — the most aggressive in 40 years — already poses a big challenge to CFO financing plans.

Since March 2022, the Fed has hiked the main interest rate from near zero to a range between 5.25% and 5.5%. Seventy percent of the survey respondents hold debt, with much of it coming due in the next few years.

“Firms that intend to roll over their debt are facing higher interest costs, which suggests that there could be some headwinds to economic growth in 2024,” the survey sponsors said.

The survey echoed data over several months indicating a slowing in business spending.

“In spite of generally positive expectations for 2024, there was some indication that firms were cutting back — for example, the share of firms that report increased spending continued to shrink,” the survey sponsors said.

Additionally, 60% of firms expect the increase in prices this year to exceed levels prior to the COVID-19 pandemic, according to the survey. They also expect to raise annual compensation by 4.6%, or 0.4 percentage points above what they consider normal.

CFOs hold solid expectations for their companies’ performance, the survey found.

Financial executives on average forecast 5% revenue growth this year and 2.7% expansion of payrolls compared with 2.2% in 2023, according to the survey.

Company analysts also enter the new year with optimism, dismissing predictions of a downturn with expectations of a rebound in earnings.

Analysts forecast 11.8% year-over-year earnings growth among Standard & Poor’s 500 companies in 2024, well above the 8.4% trailing 10-year average annual growth rate, according to FactSet.