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BUSINESS & INDUSTRY

Optimism Falls Amid Concern Over Unemployment, Government Policies

 

By MEGAN PINKSTON
AUGUST 12, 2010

Unemployment, government regulation and availability of credit caused optimism among CPA financial executives to drop sharply this quarter, and now half of executives do not expect the U.S. economy to return to pre-recession levels until after 2012, according to a survey conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School.

 

Results from the AICPA/UNC Kenan-Flagler Business & Industry Economic Outlook Survey Q3 2010 found that 21% of respondents were optimistic or very optimistic about the outlook for the U.S. economy for the next 12 months, the lowest level of optimism recorded since April 2009. This is down significantly from 40% who showed optimism during the second quarter of 2010.

 

Total pessimism increased this quarter, with 40% of respondents reporting they were very pessimistic or pessimistic about the U.S. economy, up from 25% last quarter. The remaining 39% of respondents were neutral.

 

The survey, conducted between July 21 and Aug. 5, includes responses from 1,583 CPA executives in business and industry.

 

Optimism for respondents’ own organizations decreased this quarter as well, though only slightly. Overall, 46% were optimistic or very optimistic about economic prospects for their own organizations over the next 12 months, down from 51% in the second quarter of 2010. However, financial executives from smaller businesses, those with total annual revenue of less than $10 million, were much less optimistic about their own organizations than executives employed by the largest organizations, with more than $1 billion total annual revenue (40% vs. 54%, respectively).

 

Respondents most often cited unemployment and government regulations and policies as reasons for their pessimistic outlook. Credit tightening was also cited by many executives, but was mentioned more frequently by small business executives.

 

Key performance indicators—revenue and employment—remained steady in the third quarter. Fifty-eight percent of respondents expect to see revenue increase in the coming 12 months, while 27% expect it to decrease. Expectations for hiring also remained stable from last quarter, but continue to lag when compared with expectations for revenue. Overall, 34% said they expect to increase the number of employees at their business, 21% expect decreases, and 45% expected no change in employment levels. By industry, employment prospects look the best in the technology sector, with 53% planning to increase staff.

 

“The overall results confirm that the recovery has slowed, but that managers remain cautiously optimistic,” said Mark Lang, CPA, Ph.D., a Kenan-Flagler accounting professor who analyzed the survey results. “However, uncertainty about the sustainability of the recovery continues to limit planned investment and hiring. The next few months will be crucial in determining whether uncertainty resolves to the point where firms are willing to significantly increase spending and hiring.”

 

Lang developed two indices to track sentiment regarding economic outlook and expected expansion or contraction regarding survey respondents’ organizations. The Corporate Expansion Index (CEI) decreased for the first time since January 2009, from 0.6 last quarter to 0.59 this quarter. The Corporate Optimism Index (COI) also decreased, from 0.59 in the second quarter of this year to 0.57. This is the first time both indices have decreased in the same quarter since January 2009. Ratings over 0.5 are positive while ratings below 0.5 are negative; the weighting allows for reflection of the strength of feelings. For a chart of COI and CEI values for the last two years, click here.

 

Loan Covenant Breaches and Banking Relationships

 

In a series of questions unique to this quarter’s survey, respondents were asked about the impact of the financial crisis on banking credit relationships. Sixty-nine respondents identified themselves as commercial lenders, and 863 were identified as borrowers. Among the lenders, two-thirds reported seeing a significant increase in loan covenant breaches as a result of the financial crisis, with 56% seeing breaches in multiple industry sectors and 10% in only the housing construction sector. For lenders, the most common response to loan covenant breaches was to issue a forbearance letter outlining conditions that must be met within a specified period; other common responses included granting a waiver of covenant violations and applying a monetary penalty.

 

One-third of respondents who identified themselves as borrowers reported their organization had already breached a loan covenant or expected to in the next three to six months. Of those who had already experienced a breach, 65% were able to remedy the default situation. Nearly one-half were able to renegotiate the loan with the same lender, but at less favorable terms; 16% renegotiated with a different lender; and 18% were unable to renegotiate or were in an unsustainable arrangement. Borrowers who had breached a loan covenant were most often granted a waiver of covenant violations (48%) from their lender. Other common responses included applying a monetary penalty (18%) and issuing a forbearance letter (17%). Only 3% reported that their lender called the loan immediately payable in full.

 

Full survey results are available at aicpa.org. Forty-six percent of survey respondents were CFOs, 24% were controllers, 13% were CEOs, and 10% were vice-presidents or COOs. Sixty-six percent of respondents work for privately owned entities; 15% for public companies; 11% in government or education or for associations or nonprofits; and 6% for foreign-owned companies.

Megan Pinkston (mpinkston@aicpa.org) is the JofA’s online editor.

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