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Analysis

CFO Signals™: Q3 2019

Trade and economic fears drive sentiment to multi-year lows

This quarter, CFOs’ sources of concern and uncertainty intensified. Major economies showed more signs of slowing. The US/China tariff war escalated, a no-deal Brexit became more likely, and questions about trade within North America and between the United States and Europe remained unresolved.

Q3 2019 North American CFO Signals™ overview

CFOs' assessments of the economy in Q3

Going into 2019, citing growing worries about the economic impacts of geopolitics, US political turmoil, and US trade policy, just 28 percent of CFOs said they expected the North American economy to improve—half the level going into 2018.

CFOs’ assessments continued to decline early in the year, with 75 percent of 1Q19 survey respondents expecting a US slowdown by the end of 2020 (due to trade policy, business and credit cycles, and slowing global growth). Accordingly, growth expectations for revenue, earnings, and hiring declined, and own-company optimism waned.

Still, there was cause for optimism. Only 15 percent of CFOs said they expected an extended decline in economic activity. And, in the second quarter survey, about 80 percent said they expected any downturn to be mild. That may help explain why expectations for capital spending growth continued to rise even as other metrics declined.

This quarter, however, CFOs’ sources of concern and uncertainty intensified. Major economies showed more signs of slowing. The US tariff threats toward China escalated, a no-deal Brexit became more likely, and questions about trade within North America and between the US and Europe remained unresolved.

In response, governments and investors took steps to mitigate risk. The US Federal Reserve lowered rates for the first time in a decade, and other central banks indicated a similar inclination. The US Congress passed a budget deal loosening fiscal policy. The yield spreads between the 10-year bond and both two-year and three-month bills inverted. Meanwhile, US equities whipsawed between new highs and sharp declines.

As Deloitte’s chief global economist, Ira Kalish, put it, "The world increasingly appears to be on recession watch." This quarter’s survey findings seem to indicate that large companies agree, with several key metrics hitting new multi-year and historic (i.e., 38-quarter) lows. Notably, the survey’s own-company optimism index turned negative for the first time in nearly seven years.

Download the report to read the details or the executive summary to view the highlights.

Managing investor expectations

Managing investor expectations in the face of escalating policy uncertainty and widespread expectations of slowing economic growth would seem to be both uniquely challenging and very necessary. To find out how companies are communicating with and managing the expectations of their owners, this quarter we asked about companies’ investor relations (IR) practices, as well as the prevalence and impacts of shareholder activism.

While most CFOs said their company continues to provide guidance in traditional ways (i.e., quarterly expectations for standard metrics, along with assumptions and drivers), some said they are not providing guidance at all or are providing less extensive or less frequent guidance than they have in the past. Even when earnings guidance is not provided on a quarterly cycle, it appears that most underlying IR-related analysis (e.g., income statement and balance sheet comparisons, company and business valuations, and acquisition/divestiture analysis) is still performed with that frequency—especially for publicly-traded companies.

On top of activities related to regular performance analysis and communication, many public companies appear to be undertaking activities related to anticipating and responding to shareholder activism. Just under half of these CFOs said their company has experienced activism in the last three years. Just over half said they have considered, taken, or expect to take action specifically because of activism—including many who say their own company has not recently experienced activism.

Private company CFOs, for their part, cited substantially less extensive and less frequent activity around the owner-related analysis and communications—which aligns with other survey findings indicating that avoiding both a short-term focus and public company reporting/compliance requirements were key advantages of being privately held. Perhaps not surprisingly, nearly 85 percent said they rarely or never consider taking their company public.

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Q3 2019 North American CFO Signals™ highlights

Business outlook highlights

About Deloitte LLP's CFO Signals™ survey

CFO Signals™ is about CFO issues. This quarterly survey tracks the thinking and actions of leading CFOs—representing North America’s largest and most influential companies—across four predominant areas: business environment, company priorities and expectations, finance priorities, and personal priorities.

Learn more about Deloitte's CFO Signals™ survey.

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