Trucks at Work

Economic struggles still seen as far from over

There’s a lot of concern building in business circles that the global economy – and especially that of the U.S. – isn’t projected to shift out of “sluggish mode” anytime, with worries that more “economic turbulence” lies ahead.

Take the recent global economic outlook released by the Organization for Economic Cooperation and Development (OECD) this week. While OECD Secretary-General Angel Gurría (seen at right) noted that “the recovery is real” across the world’s economies, it remains “at a slow speed, and there may be turbulence on the horizon.”

Not what you would call the start of a rousing pep talk, by any means.

"There is a risk of another bout of brinkmanship in the US, and there is also a risk that tapering of asset purchases by the U.S. Federal Reserve could bring a renewed bout of instability,” he added. “The exit from non-conventional monetary policy will be challenging, but so will action to prevent another flare-up in the euro area and to ensure that Japan’s growth prospects and fiscal targets are achieved."

The OECD believes that gross domestic product (GDP) growth across its 34-member contingent should accelerate from this year’s 1.2% rate to a 2.3% rate in 2014 and a 2.7% rate in 2015.  By contrast, the world’s economy will grow at a 2.7% rate this year, before accelerating to a 3.6% rate in 2014 and 3.9% in 2015.

Yet that global recovery pace is weaker than forecast last May, largely as a result of the worsened outlook for some emerging economies. For example, GDP growth in the U.S. is projected to hit 2.9% in 2014 and 3.4% in 2015, while Japan’s GDP is expected to drop to a 1.5% growth rate in 2014 and a 1% rate in 2015.

For Europe, a gradual recovery is expected to continue, with GDP growth of 1% in 2014 and 1.6% in 2015. And though growth has begun picking up in China, it but will remain weaker than previously projected.

Still, the OECD is lowering its global growth forecasts in its words “significantly” for this year and 2014, in large part due to weaker prospects in many emerging market economies (EMEs). Contrary to the situation in the early phases of the recovery when stimulus in EMEs had positive spillovers on growth in advanced economies, the global environment may now act as an amplifier and a transmission mechanism for negative shocks from EMEs, noted OECD Chief Economist Pier Carlo Padoan.

“Growth since the global crisis has been uneven and hesitant, while job creation has been even more disappointing,” Padoan (seen at left) said. “Clear and credible strategies are needed for how jobs and growth will be created and public finances restored. This will require a strong commitment to structural reforms in advanced and emerging market economies alike.”

He stressed that there are a range of “downside risks in this recovery,” which is still weak by past standards – pointing in particular to what he calls a “worrisome slowdown” in world trade growth, in foreign direct investment flows and in fixed investment, as well as continuation of stubbornly high unemployment, particularly in Europe, where it is only expected to fall below 12% by the end of 2015.

Perhaps unsurprisingly, business leaders here in the U.S. report that their optimism concerning economic growth may be cooling as well.

According to a survey of U.S. and European Union (EU) CFOs conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business, while most remain “moderately optimistic” toward their outlook for the global economy, they are collectively less optimistic about opportunities for their businesses and the U.S. economy.

The CFO Quarterly Global Outlook Survey, which polls CFOs of public and private businesses on their economic and business confidence, revealed a drop in the U.S. CFO Optimism index toward financial prospects for their businesses, from 70.7 in the second quarter to 65.10, the lowest position of the index over the past four quarters.

The CFO Optimism index for the U.S. economy also dropped five points from the previous quarter (56.2 from 61.2 in Q2), but remained steady for the global economy, increasing less than a point, the poll found.

By contrast, the CFO Optimism index for European CFOs increased with respect to the global economy (51.4 from 48.8 in Q1) and their businesses (60.6 from 59 in Q1). Their confidence in the U.S. economy declined slightly from the last time they were polled (61.6 from 62.4 in Q1).

Looking toward the future, U.S. respondents expect the largest increases in net earnings and health care costs, while EU respondents anticipate modest increases in revenue and capital spending in the next 12 months.

"The results demonstrate a mixed bag for companies globally this quarter as they continue to be influenced by a number of macroeconomic factors,” noted Linda Allen (seen at right), professor of economics and finance at Baruch College.

“Decreased optimism toward their businesses in particular may have impacted their decisions to cut staff and maintain expectations for a high unemployment rate,” she added. “U.S. CFOs responded that they have sufficient financial resources – cash and available credit – to expand via acquisitions and/or hiring, but continued uncertainty appears to be holding them back."

Staffing and employment continue to be among the primary factors contributing to the concerns of CFOs. While 65% of U.S. CFOs and 35% of EU CFOs are planning to hire additional staff in the next six months, mainly professionals at the entry- and mid-career levels, more than a quarter of U.S. respondents (28%) and EU respondents (31%) said they were forced to reduce headcount at their companies over the last year.

The most common factors cited by CFOs for reducing headcount were a decline in sales (44% of responses in the U.S.) and revised outlook/ long term goals (26% of responses in the U.S.). Looking forward, CFOs do not have high expectations for their country's unemployment rate, with the majority of U.S. respondents expecting it will decline slightly to 7.2% one year from now, and EU CFOs expecting an increase to 11% on average.

However, despite these challenges, the majority of CFOs in both regions are not restructuring their workforce toward just-in-time scheduling/employment practices or relying on a larger percentage of part-time employees, the poll found.

On another front, concerns over the fate of the Eurozone remain high this quarter as 70% of U.S. CFOs selected a "three or higher" when asked to rate their concern on a scale of one (not concerned) to five (very concerned), and 63% of EU CFOs expressed similar concerns.

And although half of U.S. CFOs now believe the U.S. is already in the midst of a recovery, they continue to express concerns over the impact of healthcare regulations, FEI and Baruch College found.

On average, U.S. CFOs said they experienced a 5% increase in healthcare-related costs from the Affordable Care Act (ACA) – more commonly referred to as “ObamaCare" – in the past six months, with the majority (59%) of U.S respondents expecting to increase employee co-pays because of the new healthcare regulations, 44% expecting to reduce the quality of the healthcare package and/or reduce benefits for their employees.

However, only 14% of U.S. respondents said that they were considering changes to their workforce (e.g., layoffs, furloughs) as a result of the ACA. The large majority of U.S. respondents (88%) do not have plans migrate employees or retirees to state or private exchanges.

"New healthcare regulations are likely a major cause of U.S. CFOs' decreased optimism in their business prospects and the U.S. economy, as evidenced by the actions they are continuing to take to offset the costs related to the ACA," noted Marie Hollein, FEI’s president and CEO. "Healthcare, along with the outcome of the debt ceiling [negotiations] will undoubtedly continue to impact CFOs in the next few months, and will be pivotal to business expectations for 2014."

That all makes for a pretty potent brew for the global and U.S. economies to digest in the coming months – will all sorts of potentially untold effects on the freight markets.

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