Economic Optimism Continues to Improve Among CPA Executives

Heightened optimism among CPA financial executives seems to indicate the worst of the recession is in the past, but the consensus is growing that the U.S. economy is still a ways off from achieving a full recovery. While optimism about the economy continued to improve and spread across most industries in the third quarter, the percentage of executives who don’t see a recovery beginning until at least the second half of 2010 increased substantially (27% vs. 43%) from the previous quarter, according to a survey released Wednesday.

When asked about the economic outlook for their own organizations, optimists outnumbered pessimists for the first time since the third quarter of 2008, according to results from the Business & Industry Economic Outlook Survey Q3 2009, conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School. About 38% of respondents were optimistic or very optimistic about the economic prospects for their organization over the next 12 months, while 29% were very pessimistic or pessimistic. Thirty-three percent were neutral. Respondents also were more optimistic about their own organizations than about the U.S. economy as a whole (38% vs. 26%), continuing the trend seen over the past two years.

Although optimism was more widespread than in previous surveys, it was not evenly distributed across all industries. Respondents from professional services and technology organizations see a brighter outlook for the upcoming year, with 49% and 61%, respectively, reporting they’re optimistic, compared with their colleagues in real estate and construction, who were 29% and 28% optimistic, respectively.

“We saw very substantial optimism in technology, but even more so, and we saw professional services also being really quite optimistic. But the degree of optimism extended all the way down into retail, wholesale and manufacturing to some extent, and so it seemed as though the green shoots were spreading across a wide range of industries,” said Mark Lang, a Kenan-Flagler accounting professor. (Click here to see Lang discuss this quarter’s survey results.)

Executives continued to push back the projected timing for improvements in their own organizations. Twenty-four percent of respondents said they expect the prospects for their organizations to improve in the first half of 2010 (down from 27% in the second quarter), 23% in the second half of 2010 (up from 18% in the second quarter) and 14% in 2011 or beyond (up from 8% in the second quarter). There was also a slight increase in the number of respondents who said the prospects for their own organizations were improving now—17% vs. 14% in the second quarter.

Despite the delay in when respondents predict their organizations will begin to improve, respondents expect to look at the same indicators of improvement for their businesses as last quarter. Thirty-two percent said an increase in consumer spending would be the more significant driver of improvement, 25% said an improvement in the housing market and construction, and 16% said an increase in manufacturing orders. These numbers were unchanged from the second quarter of this year.

“Executives seem to feel as though we are in a relatively flat period of demand and sales, and therefore a relatively flat period of economic activity. I would anticipate over the next few quarters an increase in demand on the part of customers, some hiring by executives, and potentially causing a ramping up of the speed of the economic recovery,” said Lang.

Also unchanged from the second quarter was the top challenge for organizations, which remains “customer demand.” But “employee health care costs” (No. 2) and “access to capital/cost of capital” (No. 3) swapped positions from last quarter’s survey. “Avoiding layoffs,” which was No. 6 among the top challenges during the first quarter of 2009, continued to drop on the list, down to No. 9 from No. 7 during the second quarter.

Layoffs, however, were third on the list of actions implemented in response to the crisis. Fifty-six percent of respondents had implemented compensation freezes, the most-cited measure, followed by capital spending cuts (52%) and layoffs (48%). This quarter’s survey also asked respondents about measures they plan to implement in the future. Eleven percent of respondents indicated they still expect to lay off employees; 10% expected further capital spending cuts and compensation freezes.

CPA financial executives also were more optimistic about the overall economy than in the previous quarter. Nearly 26% of respondents were optimistic or very optimistic about the U.S. economy’s outlook over the next 12 months, an increase from 20% in the second quarter. While there continues to be more pessimism than optimism about the economy, the percentage of respondents who were pessimistic was 41%, down from 53% who were pessimistic in the second quarter of 2009 and 83% in the first quarter.

A section of this quarter’s survey focused on health care reform, asking the executives a variety of questions regarding government participation in health care, possible legislation and mandated health care coverage by employers. Sixty percent of respondents indicated they either did not support any legislation or thought legislation should focus on increasing consumer choice and control and limit government participation. Only 12% thought a health care overhaul with the government as a major participant is needed, and 55% opposed mandating employer health care coverage.

“Far and away, the executives were much more concerned about the deficit than they were about getting a health care plan through Congress,” said Lang. “Only 12% of the respondents said that they viewed fixing health care as a more important priority than reducing the deficit. Also, Wal-Mart has come out in favor of mandating health care coverage by employers, but when you ask the executives in the survey whether they favor mandatory health care coverage by employers, the answer was again overwhelmingly ‘no.’ ”

The survey, conducted between July 22 and Aug. 10, includes responses from 1,093 CPAs in business and industry. Sixty-three percent were CFOs, 27% were controllers, and 5% were CEOs or COOs. Sixty-nine percent of respondents work for or work in privately owned entities, 12% for public companies, 13% for government, education and associations, and 5% for foreign-owned companies.

Click here to see UNC Professor Mark Lang discuss the results of the 3rd quarter survey, including concerns over inflation, the early stages of recovery and expectations for the future.

—Megan Pinkston is the JofA’s online editor. Her e-mail address is mpinkston@aicpa.org.