President Donald Trump's agenda of tax cuts, regulatory reform and infrastructure spend has stalled due to political dysfunction in Congress and this is causing US finance chiefs to delay investment plans.
The Duke University/CFO Magazine Global Business Outlook survey for the June quarter found that 40 per cent of US CFOs claimed that the level of uncertainty is currently higher than usual. Amongst this group, a solid 60 per cent said that uncertainty had caused them to hold off on capital expenditure for new projects.
"If you multiply those two numbers together, it means that current uncertainty is causing nearly one out of every four companies to delay or cancel plans," said John Graham, a finance professor at Duke's Fuqua School of Business. "That's enough to significantly dampen growth."
Respondents indicated that the delay in tax cut legislation has led them to pare back capital expenditure or become more conservative with spending in general, the survey found.
Uncertainty about what lies ahead for key trade deals also has a lot of companies in 'wait-and-see mode' right now with several CFOs indicating that plans to expand into Mexico had been cut back or put on hold.
“CFOs said they are anxious for reform that reduces tax rates across the board, for corporations, for pass-through companies, and for individuals," Graham said.
"If companies hold out for three to six months before investing, reform could allow them to immediately expense investment, meaning they might receive a bigger near-term tax deduction versus investing today. So, for a policy that might spur growth in the medium-term, in the short run the lack of clarity on the policy is causing firms to delay investment."
This quarter, for the first time, the top concern among CFOs is difficulty hiring and retaining qualified staff in an extremely tight labour market. Other top concerns included health care costs - which are expected to increase by more than 7 per cent over the next year - Washington gridlock and data security.
But so far, political paralysis has not coloured the generally positive view of the overall economic outlook.
Duke’s optimism index fell slightly in the June quarter to 67 on a 100-point scale. That’s two points lower than last quarter but still above the long-run average of 60.
Hiring plans are stronger than one year ago and US companies expect to pay higher wages, with median wage growth of about 3 per cent over the next 12 months - and even more in the construction and tech industries.
Finance professionals were just as positive in other parts of the world. Optimism was up in Europe, only a notch below the US, with European CFOs expecting capital spending to strengthen and employment to grow by a moderate 1.7 per cent in the next year.
The most pressing concerns for Europe’s finance heads include economic uncertainty, attracting and retaining qualified employees and governmental regulations and policies.
About one in five European companies said they are delaying expansion due to uncertainty about regulations and the economy. Shortage of funding and of qualified employees is evidently limiting the ability of European companies to pursue certain projects.
In Asia, CFO optimism increased to nearly the same level as in the US. While a third of finance chiefs said uncertainty about economic growth and tax policy is greater than normal, few are putting the brakes on growth plans. Still, uncertainty and overly-optimistic projections are the primary reasons that some projects are not always pursued.
CFOs of Asia-based companies estimate capital spending will rise 5 per cent in the next 12 months and employment will grow 2.7 per cent. The top concerns of finance chiefs in Asia are difficulty attracting employees, currency risk and falling employee productivity, the survey found.