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Economics of Katrina
We'll All See
Date: 9/6/2005 6:08:09 PM ( 19 y ) ... viewed 1383 times GLOBAL BUSINESS
Katrina (#4)
Our research editor, Don Durfee, tells me that our latest survey of CFO confidence provides some clues as to how Katrina will affect corporate decision-making. Don touched on the findings as well as the results of his follow-up discussions with respondents in an interview with CNBC last week. But the link’s cumbersome and he’s since done some further thinking on the topic. So his views and findings are worth posting. Here are the survey’s three most relevant findings (see the first comment for some of the more compelling results of his interviews):
1. CFOs see rising fuel costs as their number one concern, the first time it has outstripped healthcare costs, which is now number 2. According to the survey, the transportation industry will be hit hardest, followed by retail/wholesale. But it should affect everyone, mainly through higher shipping costs.
2. Capital spending will continue to be weak. John Graham, an economics prof at Duke University’s Fuqua school of business, the survey’s co-sponsor, says the current level is just enough to replace worn out equipment but no more than that.
3. CFOs expect prices of their goods and employee salaries to go up (and at higher levels than they predicted in previous quarters).
My two cents: If Katrina doesn’t lead to higher inflation (because companies can’t pass on prices), then something else will have to give. And that something else sounds like a combination of corporate spending, profits and employment. Sorry, but we just don’t see any good news here.
Posted by Ronald Fink | September 06, 2005 11:01am | Comments (1)
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One airline CFO, predictably enough, says rising oil prices are a big worry. While he’s starting to see some pricing power as the industry cuts back on capacity, it’s not enough to offset higher fuel costs. And he doubts he could pass on higher prices indefinitely without seeing a decline in travel. As for hedging, he reminds us that it’s too late for that.
Another CFO, of a road-construction company, says fuel costs top his list of worries. When oil goes up, he sees expenses rise for everything from purchasing, mixing and shipping asphalt to insurance. But like his airline counterpart, he can’t always pass on such increases. So the company will try to be more efficient by reducing its fleet size by 25 percent, loading and routing trucks more effectively, and managing its working capital more diligently. It has already stopped hiring and is reducing its workforce through attrition.
A third CFO, he of a paper company, says shipping costs already boosted by the rising price of oil will rise move still higher because of Katrina. Even before the hurricane, he notes, Union Pacific was talking about an increase of 12 percent to 15 percent in rates in addition to fuel surcharges. So he’s “definitely” not planning any significant new capex or hiring. And he adds that higher interest rates are not helping his company any.
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