June 29, 2022

CFOs See Darkening Clouds on the Horizon

Brent Meyer, Emil Mihaylov and Sonya Ravindranath Waddell

The second quarter results from The CFO Survey reveal growing concerns about the outlook for the U.S. economy. Firms continue to struggle amid the high inflation environment and against a backdrop of further removal of monetary accommodation as policymakers work to slow overall demand.

Even before the Federal Open Market Committee’s (FOMC) latest rate hike, firms had begun to revise down their revenue and employment expectations for this year. In this iteration of the survey, respondents ratcheted up their price- and cost-growth expectations sharply, a move that suggests price pressures are growing even more acute than they were last December, when CFOs were anticipating cost prices to be elevated throughout 2022.

Alongside the downgrade in financial executives’ own-firm expectations, these executives also see growing downside risks to the overall economic outlook. Business optimism over the U.S. economy slipped from 54.8 (on a 0 to 100 scale) in the first quarter to 50.7 in the second quarter, falling even further away from a post-pandemic high of 69 percent, set in the second quarter of 2021. And, importantly, CFOs are placing much more weight on the prospects for negative GDP growth over the year ahead.

In this Research and Commentary article, we dig further into these growing downside risks to growth and highlight some interesting special question results that suggest a sharp increase in borrowing rates will lead many firms to pull back on capital expenditures.

Own-Firm Expectations Deteriorate

In many ways, the second quarter decline in financial executives’ sales revenue expectations and increase in price and cost-growth expectations were a continuation of the first quarter softening. However, the revisions to the near-term outlook this quarter were sharper, and the results highlighted how sharp price pressures were stifling real, inflation-adjusted growth expectations.

CFO expectations for unit-cost growth in 2022 rose sharply — from an average 8.3 percent (median of 6 percent) in the first quarter to 10.2 percent (median of 8 percent) in the current survey. At the same time, firms’ nominal sales outlook for 2022 fell from a very strong 11.2 percent gain to a still high 9.3 percent increase, on average. And, although on a nominal basis, those figures seem strong; after adjusting for inflation (in this case, firms’ representative price expectations), sales revenue growth is expected to stagnate in 2022. In the previous survey, real revenue growth was roughly 3 percent.

CFOs’ Growth Expectations for Their Own Firms, by Response QuarterQ2 2022Q1 2022
Mean (and Median) Expected Year-Over-Year Percentage Change for Calendar Years2022202320222023
Employment (full-time)4.5%
Wage Bill8.4%
Non-wage Compensation8.0%
Unit Cost10.2%
Note: Q2 2022 data in the table reflect results for 292 to 309 U.S. firms responding to the Q2 2022 survey (May 25 – June 10, 2022). Results from the Q1 2022 survey (March 7-18, 2022) are shown for comparison (for 317 to 337 firms).

Firms also downgraded their 2023 revenue outlook, from roughly 10 percent, on average, to 6.7 percent. Here too, higher anticipated costs and price pressures eroded most of the expected revenue growth. It’s worth noting that, at least directionally, firms’ price and cost expectations were revised down modestly in 2023, suggesting that they do not see the extraordinarily high inflation continuing through the medium term.

The Likelihood of Negative Growth (the “R”-word) Doubles

Consistent with declining optimism and stagnating real revenue growth projections, respondents sharply revised down their outlook for real GDP growth over the next four quarters. On average, CFOs anticipate real GDP growth of just 1.5 percent over the next four quarters, down a full percentage point from their growth assessments in March.

Perhaps most striking is that the average probability weight CFOs attach to negative growth (recessionary) outcomes nearly doubled since March, rising to roughly 21 percent. Just two quarters ago, the average probability of negative growth was 6 percent. These results are consistent with estimates of recession risks from professional forecasters. For example, the National Association for Business Economics (NABE) Outlook Survey fielded in early May indicated that a majority of the professional forecasters surveyed see at least a 1 in 4 chance of a recession over the next 12 months.

There was also a downshift in growth expectations in the middle of the distribution. The mode of these probability distributions shifted down from a range of 2.5-3.9 percent to a range of 1.5-2.4 percent in the current survey. Firms now see a nearly 50 percent likelihood of slow growth, between 0 and 2.4 percent over the next year.

Rising Rate Environment Could Slow Capital Investment

Given that monetary policymakers have been increasing the target fed funds rate in an effort to quell inflation, we were particularly interested in how increased borrowing rates would impact firms’ plans for capital investment. We posed a question to see how CFOs would change their plans in the face of a hypothetical increase of 1 percentage point, 2 percentage points, or 3 percentage points in their borrowing interest rate. (Note that the survey closed on June 10, before the FOMC met to increase the target fed funds rate by 75 basis points to a target range of 1.5-1.75 percent.)

After eliciting firms’ current borrowing rates (weighted mean of 4.7 percent) and conditioning on firms that were actively borrowing, we asked, “In the next 12 months, how would your capital investment change, if at all, should your borrowing rate increase by [1, 2, or 3] percentage points?”

The results suggest a “threshold effect” of rising interest rates. In response to a hypothetical 1 percentage point increase in borrowing rates (presumably to an average of 5.7 percent), just 10 percent of firms would decrease capital investment plans. However, in response to a 2 percentage point increase, more than half of respondents would pull back on investment plans. And, if borrowing costs were to increase by 3 percentage points, two-thirds of borrowing firms indicate they would reduce their capital spending plans, and nearly 40 percent of borrowing firms would shrink their plans significantly.


In sum, CFOs have downgraded their own-firm outlook and expectations for the overall economy. Moreover, salient downside risks to U.S. economic growth are growing in the minds of financial executives. Amid the current high inflation environment, firms are feeling the pain of increased price pressures and see these growing costs stifling much of the strong nominal revenue growth they expect.

The FOMC is expected to continue to increase short-term rates and remove policy accommodation in order to curb inflation. One way that these moves will likely slow aggregate demand is by reducing capital investment by increasing borrowing rates. We find evidence of a threshold effect of higher borrowing rates on capital investment plans. Only in response to a hypothetical 2 or 3 percentage point rate increase do we start to see a sizable share of firms decrease capital investment plans.

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