Optimism Growing Despite Rising Inflation Concerns

BY MEGAN PINKSTON
March 3, 2011

Economic outlook is brightening this quarter, with optimism for the U.S. economy up sharply and expectations for hiring and business expansion improving as well, according to results from the AICPA/UNC Kenan-Flagler Business & Industry Economic Outlook Survey Q1 2011. However, optimism was slightly tempered by an increase in concern over inflation.  

 

Forty-eight percent of respondents were optimistic or very optimistic about U.S. economic outlook for the next 12 months, up from 28% in the fourth quarter of 2010. Overall pessimism decreased this quarter, with 18% of respondents reporting they were very pessimistic or pessimistic about the U.S. economy, down from 29% last quarter. The remaining 34% of respondents were neutral.

 

The survey, conducted Feb. 9–24, includes responses from 1,168 CPA financial executives in business and industry.

 

Optimism for respondents’ own organizations increased this quarter as well, reaching the highest level recorded in more than three years. Overall, 57% were optimistic or very optimistic about economic prospects for their own organizations over the next 12 months, up from 51% in the fourth quarter of 2010. A combined 16% were pessimistic (14%) or very pessimistic (2%) about the prospects for their own organizations, and 27% 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 about their organization’s prospects.

 

This quarter, the AICPA introduced a composite index, the CPA Outlook Index (CPAOI), which measures survey participants’ sentiment about the U.S. economy and their own organizations, expectations for revenues and profits, and plans for spending and employment. Nine components are calculated by taking the percentage of respondents who indicated that their opinion or expectation for the metric is positive or increasing, and adding to that half of the percentage of respondents indicating a neutral or no-change response. A reading above 0.5 indicates a generally positive outlook with increasing activity. A reading below 0.5 indicates a generally negative outlook with decreasing activity . The CPAOI turned up sharply this quarter to 0.69 and is at the highest level recorded since the third quarter of 2007.

 

 

Click here for a full description of the CPAOI, including the measures used in the index and how each component is calculated.

 

“We see a substantial bounce in optimism about the economy for the first time in nearly three years,” said Carol Scott, AICPA vice president–Business, Industry & Government. “The new composite index shows positive movements across the board.”

 

There is, however, more concern among respondents about the possibility of inflation. For the first time since respondents were first asked about inflation and deflation in the second quarter of 2009, more than half of financial executives were concerned about inflation over the next six months (55%), while 5% were concerned about deflation and 34% weren’t concerned about either.

 

Of the respondents expecting inflation, 36% considered increasing raw material costs the most significant risk to their business; 20% said interest rates; and 18% said energy costs. But only 12% expected to be able to pass all or most of these increased costs on to their customers next quarter. One-third said they would only partially pass on additional costs to customers, and 47% said they would not be able to pass on additional costs at all.  

 

 

Employment, Performance Indicators and Challenges

 

The survey indicates a glimmer of improvement in plans for employment and hiring. Thirteen percent of respondents said they had too few employees and were planning to hire in the immediate future, which is up from 10% last quarter. The respondents who said they did not have enough employees but were hesitant to hire dropped a corresponding three percentage points to 19%. However, expectations for when their organization’s employment would return to prerecession levels remained dim. When asked when they expected their staffing to return to prerecession levels, 23% still expected that it would take between 12 and 24 months. Another 28% didn’t expect that it would happen in the “foreseeable future.” This is virtually unchanged from the fourth quarter of 2010.

 

By industry, respondents from the technology, health care (nonprovider), wholesale trade and manufacturing sectors expected the largest increases in hiring. Overall, 24% of respondents expected their organization’s number of employees to increase less than 5%;11% expected 5% to 10% growth; and 7% expected more than 10% growth.

 

Along with optimism and hiring, key performance indicators of revenue and profit growth increased this quarter, with 72% expecting revenue increases and 62% expecting profit increases over the next 12 months. This is up considerably from one year ago, when only 54% of respondents expected revenue increases and 50% expected profit increases.

 

The top challenges for organizations remained unchanged for the fourth straight quarter, with customer demand, employee health care costs and regulatory requirements ranked as the top three challenges. A new challenge for organizations that was added to the survey options this quarter, economic and political instability, debuted as the fourth biggest challenge. Access to capital/cost of capital dropped from No. 4 to No. 6.

 

 

Tax Reform

 

In a series of questions unique to this quarter’s survey, respondents were asked about job creation and tax reform. Overall sentiment was that CPA financial executives want the government to reduce regulatory burdens and reduce spending. Aside from a corporate tax reduction, 60% of respondents said reducing regulatory burdens would have the greatest impact on their organization’s ability to create jobs. These burdens included trade, labor, tax reporting, workplace safety and security. None of the other options, which included making permanent the R&D tax credit, reducing tariffs and nontariff barriers and investing in infrastructure, were cited by more than 12% of respondents.

 

To offset a corporate tax reduction, more than half (51%) of respondents chose “reducing spending” as their favored option. Other popular choices were to tax overseas income generated by certain transfer pricing maneuvers (11%) and to eliminate tax breaks for oil and gas production (10%).

 

The recommendations were more diverse when respondents were asked their least favored option to offset a corporate tax reduction. The least popular option was to limit the mortgage interest deduction (23% not in favor), followed by enacting a carbon tax (16%) and raising the earnings cap on Social Security (13%). Twelve percent said their least favorite option was to offset a corporate tax reduction via reduced spending only.

 

Forty-six percent of respondents planned to take some advantage of the first-year tax deduction for business equipment purchases in 2011, a deduction included in the Small Business Jobs Act passed by Congress in 2010. But only 12% expected to take advantage of the full $500,000 deduction by spending more than $500,000 but less than $2 million. Another 13% planned to spend more than $2.5 million on business equipment purchases in 2011, causing a total phaseout of the deduction, and 27% did not plan to purchase eligible equipment.

 

The perspectives of a panel of CFOs and key CPA decision makers 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 March 10 at 2 p.m. EST. More information about “The CPA/CFO View on Recovery. Is it for Real?” webcast, which is free for AICPA members and includes 1.5 hours of CPE credit, can be found in the AICPA Store .

 

Full survey results are available at aicpa.org/cpaoutlook . Fifty-two percent of survey respondents were CFOs; 16% controllers; 13% CEOs or presidents; and 10% vice presidents or COOs. Seventy-one percent of respondents work for privately owned entities; 12% in government or education or for associations or nonprofits; 11% for public companies; and 5% for foreign-owned companies. Ten percent came from organizations with annual revenues of $1 billion or more; 19% from organizations with $100 million to under $1 billion; 47% from organizations with $10 million to under $100 million; and 24% from organizations with under $10 million in revenues.   

 

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

 

More from the JofA:

 

 Find us on Facebook      Follow us on Twitter

 

PROFESSIONAL DEVELOPMENT: EARLY CAREER

Making manager: The key to accelerating your career

Being promoted to manager is a key development in a young public accountant’s career. Here’s what CPAs need to learn to land that promotion.

PROFESSIONAL DEVELOPMENT: MIDDLE CAREER

Motivation and preparation can pave the path to CFO

CPAs in business and industry face intense competition to land a coveted CFO job. Learn how to best prepare yourself for the role.

PROFESSIONAL DEVELOPMENT: LATE CAREER

Second act: Consulting

CPAs are using experience to carve out late-career niches. Learn how to successfully make a late-career transition to consulting, from CPAs who have done it.