To understand the causes of the reduced optimism, the survey asked executives to choose the top three items, from a list of 15, that are concerns for their companies. Following high fuel costs, CFOs report are concerned about increasing healthcare costs and rising interest rates.

In addition, CFOs predict only modest employment growth for the coming year, and 20 percent say they expect to reduce employment. Despite their concerns, CFOs expect solid earnings growth for their own companies.
   
These are some of the findings of the year-end 2005 Duke University/CFO Magazine Business Outlook survey, which asked CFOs from a broad range of public and private companies globally about their expectations for the economy.

Relative to the low inflation of the last decade of the Greenspan era, 81.5 percent of CFOs believe that inflation will be higher over the coming decade. CFOs expect their own companies to raise prices by 3 percent in 2006, continuing an upward trend over the past year (a 2.8 percent price increase was expected in last quarter's survey, 2.1 percent two quarters ago and 1.7 percent one year ago).

"The pivotal result in the entire survey is the CFOs' perceptions of inflation in their own product prices. The doubling of inflation expectations over the past year is a disturbing trend," noted Campbell Harvey, professor of finance at Duke's Fuqua School of Business and the founding director of the survey. "There is a strong asymmetry in inflation expectations: 81.5 percent of respondents think inflation will rise, while only 0.5 percent believe inflation will fall. This is not news that the new Fed chairman wants to hear."

In other price news, CFOs say their fuel costs rose by 23 percent during the past year, but only 43.3 percent have taken steps to reduce those costs.

"Executives cite high fuel costs as their No. 1 business concern for 2006, but nearly 57 percent of firms say that they have not done anything to reduce these costs," said John Graham, a Duke finance professor and the director of the survey. "This suggests that many CFOs feel their hands are tied when it comes to fuel prices."
   
Of the 43 percent of firms that have taken actions to become more fuel efficient, half say they improved facility management, 41 percent now use more efficient shipping methods (such as consolidating shipments), 31 percent use a more fuel-efficient production process, 30 percent have reduced business travel and 29 percent have increased hedging to offset changes in energy prices.

"The specter of increased inflation is not being driven just by fuel costs," Harvey said. "The CFOs see continued upward pressure on wages, salaries and benefits over the next year."

Business optimism about the U.S. economy remains low. Nearly 39 percent of CFOs are more pessimistic about the national economy now relative to how they felt last quarter, while 32.1 percent say they are more optimistic. The level of optimism is down sharply from one year ago, when 54.2 percent of CFOs said they were growing more optimistic.
    
"Since we began this survey in the mid-1990s, we have found CFOs to be optimistic about their firms and the economy," said Don Durfee, research editor of CFO Magazine, "so it is alarming that American CFOs are so pessimistic. We've found that the optimism index is a good indicator of future economic growth. In a situation like this, where the growth in pessimism outweighs the growth in optimism, we expect slower economic growth."
    
U.S. capital spending plans remain modest. Sixty-four percent say they will increase capital spending in the next 12 months, with the average
increase 5.7 percent (up from 4.7 percent last quarter). This finding stands in stark contrast to Asia, where capital spending is expected to rise by 9.7 percent.

Despite their gloominess about the economy, U.S. CFOs are more upbeat about their own companies. They expect strong earnings to continue in 2006, predicting an increase of 11.4 percent among public firms, on average.
   
To investigate how corporations have maintained strong earnings growth in the face of rising input costs and economic uncertainty, the CFOs were asked to rank the factors that were the greatest contributors to their profitability during 2005. Strong domestic demand was the greatest contributor to corporate profitability, followed by cost-cutting efforts. Increased operating leverage and productivity gains unrelated to information technology are also noted as big contributors to recent corporate profitability.

Thirty-four percent of CFOs say their firms plan to increase their cash holdings, with an increase of 4.6 percent averaged over all firms.
   
"This continues a recent trend in which firms hoard cash whenever possible," Graham noted. "Companies like to have a cash cushion in uncertain
times, to shield them from unexpected negative shocks. However, at some point, holding too much cash becomes detrimental to stock returns because of the low return earned on cash and marketable securities."