After a dramatic drop in optimism the previous quarter, CPA executives regained some confidence about the economic prospects for their organizations, according to results from the AICPA/UNC Kenan-Flagler Business & Industry Economic Outlook Survey Q4 2010. This improved sentiment, however, is not translating into hiring growth, which remained virtually unchanged from last quarter.
Twenty-eight percent of respondents were optimistic or very optimistic about the U.S. economic outlook for the next 12 months, up from 21% in the third quarter of 2010. Overall pessimism decreased this quarter, with 29% of respondents reporting they were very pessimistic or pessimistic about the U.S. economy, down from 40% last quarter. The remaining 43% of respondents were neutral.
The survey, conducted Nov. 9–30, includes responses from 1,443 CPA executives in business and industry.
The outlook for respondents’ own organizations rebounded this quarter as well, increasing to levels seen in the second quarter of this year, when more than half of respondents were optimistic for the first time in more than two years. Overall, 51% were optimistic or very optimistic about economic prospects for their own organizations over the next 12 months, up from 46% in the third quarter of 2010. A combined 17% were pessimistic (14%) or very pessimistic (3%) about the prospects for their own organizations, and 32% were neutral. By industry, CPA executives in the technology sector were the most optimistic, while those employed by health care providers and construction companies were the most pessimistic.
Even though optimism increased this quarter, there’s a growing feeling among respondents that recovery will be slow. Sixty-one percent do not expect the U.S. economy to return to prerecession levels until after 2012, which is up from 50% last quarter. Only 7% expect the U.S. economy to recover by the end of 2011, which is down from 16% last quarter.
Twenty-two percent expect their organizations to return to prerecession levels by the end of 2011, down from 29% last quarter. This does not include the 9% who said their organizations had already returned to prerecession levels, and the 10% of financial executives who did not see a downturn in their organizations at all due to the economic crisis. Thirty-two percent said they would not fully recover until after 2012, up from 28% last quarter.
Respondents in smaller companies showed the largest improvement in optimism. In companies with less than $10 million in annual revenue, optimism increased from 40% to 51% this quarter, while medium- and large-size businesses saw increases of 2 to 3 percentage points. It’s important to note that despite an 11-percentage-point increase in optimism, financial executives in small businesses were still less optimistic than their counterparts in businesses with more than $1 billion in annual revenue (51% vs. 57%, respectively).
Employment and Performance Indicators
The survey indicates that hiring will remain slow and cautious, and expectations for hiring continue to lag behind expectations for revenue and profit. When asked when they expected their staffing to return to prerecession levels, 21% still expect that it will take between 12 and 24 months. Another 32% don’t expect that it will happen in the “foreseeable future.”
Thirty-four percent of respondents, the same as last quarter, said their companies will increase their headcounts over the next 12 months, while 48% are planning to keep headcount the same, up 3 percentage points from last quarter. Nineteen percent said they expect to reduce headcount in the next 12 months. The largest businesses are both most likely to expect to increase headcount and to reduce headcount with 39% expecting increases and 23% expecting decreases. The smallest businesses were most likely to expect staffing to remain unchanged.
Key performance indicators of revenue and profit growth remained fairly steady this quarter, with 61% expecting revenue increases and 55% expecting profit increases over the next 12 months. However, both have improved significantly over the fourth quarter of 2009, when 52% expected revenue increases and 49% expected profit increases. Similarly, expectations for changes in employee costs, such as average total salary and benefit packages, were stable from the previous quarter, with the exception of health care costs. This quarter, the number of respondents who expect health care costs to rise more than 8% is at its highest level ever. Fifty-one percent expected health care costs to increase more than 8% over the next 12 months, up from 46% last quarter and 41% in the fourth quarter of 2009.
“The good news is that corporate expansion expectations continue to gradually improve and are at levels seen shortly before the recession, with improvements across most industries and geographic regions. The bad news is that growth remains slow and companies are hesitant to substantially increase spending and hiring,” said Mark Lang, CPA, Ph.D., a Kenan-Flagler accounting professor who analyzed the survey results. “It appears that we are caught in a cycle of slow growth leading to slow corporate spending, which further limits growth, and it is unclear how we will break out of the cycle.”
Lang previously developed two indices to track sentiment regarding economic outlook and expected expansion or contraction regarding survey respondents’ organizations. This quarter, the Corporate Expansion Index (CEI) rebounded to 0.62, up from 0.59 last quarter, and is at the highest level since October 2007. The Corporate Optimism Index (COI) also increased, from 0.57 in the third quarter of this year to 0.59. Ratings above 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 CEI and COI values for the last two years, click here.
Cash and Liquidity
In a series of questions unique to this quarter’s survey, respondents were asked about cash and liquidity, and plans for either deploying or raising funds. When asked how to characterize their organization’s current liquidity position, 32% of respondents reported having more cash than they needed. However, only about one-third of those respondents had plans to deploy their liquid assets. The remaining 22% are reluctant to deploy.
Of the remaining respondents, 14% had less cash than they needed and said credit and capital availability or pricing was a barrier to raising more capital; 12% said they had less cash than they needed and planned to raise capital; and 42% had about the right amount of liquidity.
Looking six months into the future, more than one-quarter of respondents said their organization had plans beyond normal operations for deploying net liquid assets. The top strategies included making capital investments, expanding operations, reducing debt and making acquisitions. On the other hand, 47% of respondents said their organizations plan to raise additional capital over the next six months. The most cited plans for raising capital were short-term borrowings, and long-term and private equity debt.
Responses to this series of questions regarding cash and liquidity, and the perspectives of a panel of CFOs on general economic trends, business expansion and hiring plans, and key economic, tax, and other policy issues that are likely to impact business in 2011, will be featured in a webcast scheduled for Dec. 14 at 2 p.m. EST. More information about the “2011 Economic Outlook from the CFOs’ Viewpoint” webcast, which is free for AICPA members, can be found in the AICPA Store.
Full survey results are available at aicpa.org. Half of survey respondents were CFOs; 21% controllers; 13% CEOs or presidents; and 10% vice presidents or COOs. Seventy percent of respondents work for privately owned entities; 12% for public companies; 11% in government or education or for associations or nonprofits; and 5% for foreign-owned companies. Eight percent came from organizations with annual revenues of $1 billion or more; 22% from organizations with $100 million to under $1 billion; 46% from organizations with $10 million to under $100 million; and 24% from organizations with under $10 million in revenues.
—Megan Pinkston (firstname.lastname@example.org) is the JofA’s online editor.
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