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Financial Executives Institute

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Clair Tweedie

Financial Executives Institute

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Cabell Smith

The Fuqua School of Business

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CFOs PREDICT CONTINUATION OF ECONOMIC BOOM

DURHAM, N.C., July 22, 1997 -- Chief financial officers expect the nation's current economic surge to continue over the next four quarters, according to the most recent Financial Executives Institute / Duke-Fuqua School of Business Corporate Business Outlook Survey released today.

Almost 84 percent of the 450 executives polled expect earnings to be higher over the next four quarters than they were over the previous four quarters. In fact, the survey's earnings index for the next four quarters is the highest it has ever been. The index now stands at 78, up from last quarter's level of 69.

The Business Earnings Index measures executives' sentiment by assigning a value of -1 to respondents who believe earnings will fall, a zero to those who believe they will remain unchanged, and a +1 to those who indicate that their firm's earnings will increase. The index is developed by summing across categories and dividing by the number of respondents and multiplying by 100.

The CFOs' assessment of the probability of an increase in interest rates in the next four quarters has dropped sharply, from 75 percent in April 1997 to 50 percent in the current survey. Based on a lower likelihood of rate hikes and expectations of higher earnings, the consensus forecast of the probability of a recession over the next four quarters has declined to less than 20 percent, down from 25 percent in April.

"There are, however, some interesting asymmetries in interest rate expectations across business size," says Professor Campbell R. Harvey, co-director of the FEI/Duke Survey. "The CFOs of small firms, those with fewer than 100 employees, think there is a 59 percent probability of a rate hike. In contrast, CFOs of companies with revenues over $5 billion think the chance is only 44 percent."

The survey results indicate that merger and acquisition activity, currently at an all-time high, will increase even more over the next year. Noting that the survey's M&A index rose from 27 to 35, co-director Professor Michael Bradley said, "There is no indication that M&A activity is waning, which is somewhat surprising given the record level of the stock market. This is consistent with CFOs' belief that earnings will continue to grow and that the market is not overvalued."

The survey's Business Strengh Index, which combines earnings, capital investment, research and development, M&A activity and employment plans, climbed to a near-record level of 43, up from 37 in the previous quarter. These projections could have a significant economic impact, according to Harvey. "For example, 59 percent of CFOs think their firms will increase employment over the next year while only 15 percent expect a decrease in hiring. This will put more pressure on an already tight labor market," he noted.

"The expected economic conditions are almost ideal--low inflation, low unemployment and continued strong corporate profits," notes William U. Parfet, FEI chairman and co-chairman of MPI Research in Mattawan, Mich. "This compresensive survey indicates continued positive economic news for our member companies. And since we represent such a diverse cross-section of the business community, the results extrapolate into good news for the business sector."

The survey was conducted between July 1 and 8. The questionnaire was faxed to 2,500 chief financial officers who are members of FEI. Four hundred fifty responded from a cross-section of U.S. businesses, for a response rate of 18 percent. The survey is conducted at the beginning of each quarter.

Complete survey results are available on the Internet at:

<http://www.duke.edu/~charvey/survey/index.htm>

Financial Executives Institute is the leading advocate for the views of corporate financial management. Its 14,000 members hold policy-making positions as chief financial officers, treasurers and controllers at 8,000 companies throughout the United States and Canada.

The Fuqua School of Business at Duke University was founded in 1970. Fuqua's mission is to provide the highest quality education for business and academic leaders and to promote the advancement of the understanding and practice of management through research.

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Table 1 -- Earnings Index