The Freefall – A View from Main Street

Duke University/CFO Magazine survey 1,275 CFOs in the U.S., Europe and Asia was released today.

I am the founding director of this quarterly survey and we have been conducting the survey for the past 51 quarters.

The survey is unique because it focuses on CFOs. In the past, our survey has provided information in advance of other popular surveys, like purchasing manager surveys. The intuition is that the CFOs know the investment projects before they give orders to the purchasing managers.

We inserted many special questions on this quarter’s survey to help central bankers assess credit conditions at the firm level. While the Fed has lots of information from bankers, our survey provides a look at how small, medium and large businesses are struggling in the current financial crisis.

The current read is staggering. We all knew the economy was in the toilet but this is really bad. Let me highlight two examples:

1. Firms are in slash mode. They will slash employment by 5% and they will do it quickly. This implies a rate of unemployment well into double digits.

2. CFOs are fundamentally worried about the health of the financial institutions they deal with. 75% were concerned about the health of the financial firms they do business with.

The FDIC recently told us that they had 177 banks (out of roughly 8,500 financial institutions) on the watch list. The survey suggests that FDIC’s estimate is at best a low-ball estimate and at worst a highly misleading indication of the health of financial system.

The survey shows that that the freezing of the credit market is having negative implications for the real economy.

Among companies that have been affected by credit market turmoil, 62 percent say they cannot access the credit they need, and half say that the cost is higher when they are able to access it. About one-third of companies have had difficulty establishing or renewing bank lines of credit.

The full release of the survey is available here.

The inability to access credit is just the tip of the iceberg. This is also a crisis of confidence. A stunning three fourths of respondents don’t have confidence in the financial institution that they deal with.

We’re looking into the economic abyss. CFOs are in crisis mode. Right now, job number one for CFOs is to make sure the firm survives – and they’re taking drastic actions. The steep drop in capital spending is three standard deviations below what we would normally expect; advertising has been slashed by four standard deviations. Employment is sharply lower – 3.5 standard deviations below normal.

Let’s focus on the employment number. We heard yesterday that Sony was cutting 5% of worldworld wide staffing. What if U.S. employers did the same thing?

Currently, there are 144 million people employed in the U.S. (excluding farms). 5% let go would be 7.2 million added to the roles of unemployed. This implies an staggering unemployment rate of 11.7% .

Financial market turmoil is wreaking havoc with our economic growth opportunities. More than 75 percent of firms say that in the current environment, financial constraints have limited their ability to invest in profitable projects. This means that firms want to spend on attractive projects (that create jobs and profits) – but they can’t because there is no way to get a loan to finance the project.

This has long-run effects too – because many of these projects last a number of years.

The CFOs cannot really see the trough. They believe that we have at least another year of this mess. Indeed, the survey shows an acceleration of the downside. The optimism diffusion index is in a free fall.

What to do?

I repeat here some of the points that I have made previously.

1. Create a fund to buy up troubled assets – at fair market value. The credit system will not work until we purge these toxins

2. Mandatory equity injection (small amount and passive) into all viable financial institutions.

3. Relegate all non-viable institutions to RTC-II to be unwound. Americans are fully aware that there are more than 177 financial institutions at risk.

Steps 1-3 will instantly build confidence in the banking system.

But other actions are necessary:

4. Government sponsored restructuring of mortgages (no just reducing interest, but resetting principal).

5. Programs to allow small and medium sized businesses to get the credit they need. These firms are the growth engine for employment.

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3 Responses to The Freefall – A View from Main Street

  1. Peter Moles says:


    What you describe about the reaction of CFOs in the US is being scarily repeated elsewhere–and we are experiencing the same phenomenon here in the UK. I am not sure that your proposed steps to rebuild confidence in the banking system will be enough to stop the implosion of credit (both in terms of availability and price) or the (rational) reaction of businesses to the current situation (conserve cash; slash overhead, etc.).
    I think either a government bank or reorganization corporation to provide the necessary capital is needed. Italy set up its IRI (Industrial Reconstruction Institute) to provide the necessary funding during the depression due to the market’s failure. Even if private institutions want to bail out companies (e.g. private equity), they cannot get the funds to do this and–in many cases–are having to deal with massive redemptions from investors.

  2. David Jamieson-Drake says:

    I am concerned that none of your proposals address the mindset behind the decisions of CFOs to slash employment at their companies. CFOs launching preemptive strikes against falling corporate revenues locally will indeed propagate into double digit unemployment globally, and indirectly but inevitably exacerbate the very situation of falling revenues they (think they) are hedging against. I hear nearly every day warnings in the news media from politicians and economists alike, warnings directed at consumers to spend, to invest, anything but hide their money in mattresses. I would like to see the very valuable findings from your CFO survey translated into appropriate measures and communications addressed to them. What if a key difference between a V recession (sharply down but sharply and shortly back up) and the next depression turns out to be the difference between CFOs slashing payroll proleptically, on the one hand, and cutting back prudently and patiently as local circumstances actually require on the other? I am neither a politician nor an economist so the only suggestion I can make that is even nominally substantive is the simplest one possible: how about using your survey findings and the inferences you draw from them as a basis for formulating communications to CFOs that could help short-circuit this self-fulfilling prophecy?

  3. Peter Moles says:

    But isn’t want you want CFOs to do exactly the nature of the problem. It is entirely rational for them at the firm level to cut back if demand isn’t there and they face cash flow difficulties. But when they all do it at once … They know that at the national (global) level it doesn’t help, but since they’re bust at the firm level (and be out of a job) if they don’t they don’t really have a choice … this is why economics has been called the dismal science 🙂

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