Bank of America Merrill Lynch’s 2013 CFO Outlook survey provides insight into what U.S. financial executives are thinking and planning for the months ahead. Assessing their collective views of the economy, sectors, their own corporate performance and other potential activities in 2013, it’s clear that most are proceeding with cautious optimism.

Middle Ground for Economic Optimism

Taking a ‘Wait and See’ Approach

Q: How would you rate the current state of the U.S. economy, the world economy and the manufacturing and services sectors?

CFOs rated the U.S. economy halfway between extremely strong and extremely weak, giving it a score of 49 out of 100. The rating is five points higher than it was a year ago, but four points lower than in the fall of 2012. The likely reality is that while financial executives haven’t seen enough positive indicators to sustain growing optimism, they continue to take a “wait and see” approach as the 2008 financial crisis grows more distant. By comparison, the highest U.S. economic rating in the 15-year history of this study was 67 in 2007, and the lowest was 44 in 2010 and again in 2012.

Current views of the global economy are even more critical. With an average rating of 45 — identical to last fall and two points higher year over year — concerns clearly remain about the economic, political and military crises that plague the international community.

The U.S. services sector was rated 59, three points higher than at the onset of 2012. Similarly, CFOs rated manufacturing a 53, up three points year over year.

Q: Do you think the U.S. economy will expand, contract or stay the same in 2013?

While 39% of CFOs are optimistic that the U.S. economy will expand, 24% now predict economic contraction in the year ahead, compared to 11% in 2012 and 6% the previous year. The percentage of CFOs who expect the economy to stay the same is now 36%, compared to 49% in 2012.

Q: How would you rate your concern about the potential impact the following factors will have on the U.S. economy in 2013?

The concerns CFOs express about the U.S. economy have decreased in number and severity since 2012. Like last year, their three leading concerns are: effectiveness of the U.S. government (64%), the U.S. budget deficit (63%) and healthcare costs (62%). Concern has lessened considerably when it comes to unemployment (43%), consumer confidence (41%) and energy costs (34%). The most improved factor is the U.S. housing market, which was cited as a chief economic concern by only 20% of CFOs, compared to 44% at the onset of 2012.

Corporate Performance Remains on Path

Steady Predictions for Revenues, Profits and Hiring

Q: do you expect your company’s profit margin to increase, decrease or stay the same

in 2013?

Similar to 2012, 56% of CFOs expect their company’s revenues to increase and 34% think they will stay the same. While only 10% expect revenues to fall, that’s 4 percentage points higher than 2012, which may be a reflection of diminished economic optimism.

Q: do you expect your company’s profit margin to increase, decrease or stay the same in 2013?

For the second consecutive year, four in ten CFOs expect profit increases. However, 22% predict a less profitable year, compared to 15% previously, while 37% expect flat profits, down from 44% in 2012.

Q: Do you expect your company’s product pricing to increase, decrease or stay the same in 2013?

The 2013 pricing strategy of U.S. companies is virtually identical to 2012. Similar to last year, half of the companies intend to charge more for what they sell, 43% expect the same prices and 6% say they will lower prices. This status quo approach is likely connected to prevailing views of the economy and corporate performance.

Q: Which of the following best describes your company’s level of capital expenditures in 2013?

Only 32% of U.S. companies plan to increase their capital expenditures in order to maintain or increase the scope of their operations, which is on par with last year. The remaining companies are taking a more conservative approach by keeping their capital expenditures steady (38%), spending less (21%) or avoiding capital expenses (8%).

Q: Which best describes your company’s employment plans for 2013?

Like their pricing strategies, steady corporate employment plans appear to correlate with performance expectations. As a result, the nation’s employment picture may continue to improve, as 45% of companies are planning to hire either permanent or contract employees in 2013. Likewise, previous gains should hold, as 48% anticipate steady employment levels, while only 8% are expecting layoffs. The primary reasons cited for not hiring include weak demand, uncertainties about healthcare costs and worries about the economy.

Q: Will your company’s 2013 R&D expenses be higher, lower or about the same as 2012?

Assuming that research and development is a barometer of future growth, it’s promising that 72% of CFOs report a steady outlook for R&D expenses in 2013 and 20% forecast a year-over-year increase. Only 7% plan to reduce R&D spending.

Q: Do you expect your labor cost per unit to increase, decrease or stay the same in 2013?

Potentially connected to concern over rising healthcare costs, 72% of CFOs expect to pay more for labor in 2013. This is up from 58% reported the previous two years. Of the remaining companies, 24% say labor costs will remain the same and only 3% are forecasting decreases.

Q: What are the most significant financial concerns about your company?

As new laws begin to take effect, CFOs cite healthcare costs (58%) as their chief concern for the third consecutive year. Concern diminished, however, across most other factors. revenue growth was a distant second at 43%, followed by cash flow (34%), corporate tax rates (34%), energy costs (31%) and consumer confidence (30%). new to the survey this year, 26% of U.S. companies express concern over the availability of qualified labor.

Strategy and Finance — Caution Prevails

Companies Stay the Course

Q: Does your company plan to participate in any mergers or acquisitions in 2013?

In keeping with the M&A slowdown in recent years, 72% of CFOs say they have no merger or acquisition plans this year. Only 22% anticipate M&A activity, up 4 percentage points from 2012.

Q: Do you think the purchase price for companies today is lower than a year ago? Will it increase, decrease or stay the same in 2013?

Responding to whether the current purchase price for companies is lower than a year ago, 53% say no, 38% say yes and 9% aren’t sure. CFOs are similarly divided when it comes to predicting purchase prices in 2013, with 34% anticipating an increase,c18% a decrease and 43% no change.

Q: Will your company’s borrowing needs increase, decrease or stay the same in 2013?

Most U.S. companies (65%) expect their borrowing needs to remain the same as last year. Of the remaining companies, 17% report that their borrowing needs will increase and 17% plan to borrow less. Of those planning to borrow, the leading need is working capital requirements (42%), followed by financing a merger and/or acquisition (34%) and geographic expansion (34%). Primary reasons to reduce borrowing include uncertainty about the sustainability of the economic recovery (30%), concern about future taxes and government regulation (29%), and excess capacity (28%).

Q: Which of the following best describes your company’s investment objectives over the next six months?

Amid ongoing caution about the economy, more than two-thirds say they plan to invest very conservatively in the short term. Specifically, 43% are accepting moderately lower returns by reducing the term of the investment and/or selecting less risky assets, while 28% are accepting significantly lower returns by reducing term and/or choosing less risky assets. Only 21% are choosing riskier assets or conditions in order to achieve higher yields on their investments.

Q: Do you expect your financing cost of capital to increase, decrease or stay the same in 2013?

Seventy-one percent of CFOs expect financing costs to remain flat in 2013. Of the remainder, 19% expect higher financing costs and 9% anticipate a decrease.

Q: Which of the following three investment types will you most likely use for your excess liquidity in 2013?

In keeping with their conservative approach in 2013, the most cited investment vehicles for excess liquidity are investment sweeps (22%), money market mutual funds (20%) and demand deposit accounts (19%). Rather than investing excess liquidity, 32% report they will use it to pay down debt.

U.S. Companies Cover More Ground

Foreign Markets Are Familiar Territory

Q: Do you sell to, buy from, or have operations in foreign countries?

U.S. companies are covering more ground to compete in the global marketplace. The majority of U.S. companies surveyed (73%) do business internationally. Among those that do, 62% buy from foreign markets, 55% sell to foreign markets and 30% have foreign operations. Only 27% have no foreign involvement.

Q: Will your sales to foreign markets increase, decrease or stay the same in 2013?

Fifty-three percent of companies that sell to or have operations in foreign countries are expecting their international sales to increase. Of the remaining companies, 38% think their sales to foreign markets will stay the same and 8% expect a decrease.

Q: What percentage of your company’s revenues do you expect to come from international sales or operations in 2013?

Among all U.S. companies doing business internationally, 42% report that less than 10% of their company’s revenues come from their international sales or operations. Of the remaining companies, 43% generate between 11% and 49% of their revenues internationally, and 13% say that international sales or operations produce 50% or more of their total revenues.

The full report and accompanying webcast are available at