CFOs Enter 2012 Seeing Strong Backlogs, Expect Other Improvements

The new year begins with U.S. chief financial officers predicting a strongly more positive outlook for order backlogs, while seeing generally better indicators in key areas such as capital spending. But the Tatum survey of CFOs, taken among executives at mostly small to mid-sized companies around the U.S., still leaves an overall feeling of what the CFO services firm calls “cautious optimism.”

The December report from Tatum had represented a sharp upward swing in the survey’s key indicators. So a continuation of the trend is “a definite improvement over the negative outlook that we have been seeing in the recent past,” Tatum’s January report says. But the most recent study also notes “continued uncertainties as we begin 2012: the issues surrounding the Euro, the unclear outlook for the U.S. economy and capital markets and the 2012 presidential election coming in the fall.”

The report continues: “Interestingly, while we saw an improvement in plans to increase CapEx spending and hiring, there was a schism with an slight increase in our respondents saying that they plan to cut back in these areas. These results are what keep the optimism damped down at this time.”

A Pattern We’ve Seen Before

Tatum senior partner Sam Norwood tells CFOworld: “We have seen this pattern before when business conditions start to improve following many months of soft conditions: It takes a while for business leaders to gain confidence that what they are experiencing is for real and sustainable. So, we enter 2012 on a positive note, and we characterize the near-term outlook as one of cautious optimism.”

Specifically, the 32% of the 95 CFOs surveyed by Tatum report improvements in orders on hand in December, up from 28% a month earlier. In the second month of sustained improvement in backlog indicators, only 10% reported a worsening of backlogs, down from 15%.

Meanwhile, those expecting backlogs to improve over the next two months surge to 51% from 37% in the prior month, while those expecting worse conditions are at 5%, down from 6%.

Sharp Rise in Cap-Ex Expectations

CFOs committing more funds to capital spending also rise sharply — to 30% from 21%, while those committing less to cap-ex fall to 20% from 26%. Those planning higher capital spending also are up, to 34% from 28%. However, those expecting less capital spending increase, too, to 18% from 15%, perhaps suggesting why the “cautious” modifier was chosen by Tatum to appear with “optimism.”

Tatum’s overall index of business conditions continues trending upward in the January report after the December swing, rising to 3.5 from 3.0 — and up from a 1.8 score two months ago. In its scoring, a range of 2.0 to 3.0 correlates with zero economic growth. Thus, the latest results “are now solidly predicting that the economy will NOT be recessionary in the near term,” the Tatum report says, noting that its index was below 2.0 throughout the 2008-2009 recession.

Hiring, Financing Conditions Better

Further, 42% of the latest survey respondents expect improvement in overall business conditions over the next 60 days, the same level as in the prior month, with 11% predicting a worsening, up slightly from 10%. (The remaining 47% see conditions remaining the same.)

In other areas in the Tatum survey, CFOs reporting the hiring of more workers rise in the latest report to 26% from 18%, while those saying they did less hiring stay at 14%. There is a sharp increase among those expecting to do more hiring in the next two months — to 36% from 26%, although those expecting to reduce hiring are up, as well, to 15% from 12%.

Financing conditions improved last month in the eyes of 20% of CFOs surveyed, up from 17% who felt that way in the prior period. And those who saw conditions worsening fall to 8% from 13%. In the next two months, 26% expect financing conditions to improve, up from 20%, while those expecting a worsening of those conditions slide to 10% from 11%.