Economic Outlook Improves

Optimism about the U.S. economy’s prospects improved sharply in the second quarter, but compensation freezes, layoffs and capital spending cuts are still on the horizon for about half of companies, according to a new survey of CPA financial executives.

Nearly one-fifth of respondents were optimistic or very optimistic about the U.S. economy’s outlook over the next 12 months, according to results from the Business & Industry Economic Outlook Survey Q2 2009, conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School. Barely 5% expressed similar optimism in the first quarter of 2009. It is the first time in almost two years that the proportion of respondents expressing optimism in the U.S. economy has increased quarter to quarter. The government, improving economic indicators and the availability of credit were cited as causes for optimism in open-ended comments by respondents.

While more than one-half (53%) of respondents had a pessimistic or very pessimistic outlook for the economy in the second quarter of 2009, overall pessimism was down from 83% in the first quarter. The percentage of respondents who were “very pessimistic” decreased even more sharply—from nearly 21% in the first quarter to 7% this quarter.

More respondents said their outlook for the economy in the next year had become “much more confident” or “slightly more confident” since the previous quarter, exceeding those who reported “slightly less” or “much less” confidence (41% vs. 31%). Slightly more than one-quarter (29%) said they were “as confident” as the previous quarter.

Respondents implemented or were planning to implement an array of measures in response to the current economic conditions. The most cited cost-cutting measures included compensation freezes (56%), layoffs (49%) and capital spending cuts (49%), followed by travel restrictions and hiring freezes (multiple responses were permitted).

“This is the first encouraging news we’ve seen in a long time. There seems to be a broad consensus that the worst of the downturn is over for the U.S. economy. On the other hand, it is disconcerting that, while managers are generally more optimistic than they had been, they appear to be conservative in their investment and hiring plans,” said Mark Lang, professor of accounting at the Kenan-Flagler Business School. “Overall, the results suggest that we may have reached a bottom, but improvements in spending and employment are likely to be very gradual.”

Predictions regarding when the economy would improve were virtually unchanged from the previous quarter, with 41% of respondents expecting improvement in the first half of 2010 and 33% by the second half of 2009 (compared with 41% and 32%, respectively, in the first quarter). Twenty-seven percent did not expect recovery to begin until at least the second half of 2010, if not later.

Asked when the prospects for their company, organization or business would begin to improve, about 14% of respondents said they were already noticing signs of improvement and about 9% did not see any downturn. Of those waiting for conditions to improve, more than half expected it to happen within the next year—23% thought improvement would begin in the second half of 2009 and 27% in the first half of 2010. The most significant drivers or indicators of improvement for respondents’ own organizations were:

1.     An increase in consumer spending (31%)

2.     Improvement in housing market/construction (23%)

3.     An increase in manufacturing orders (17%)

4.     Other—including availability of credit, financing and loans in the commercial and consumer markets, decrease in unemployment, and improvement of financial markets (28%)

Comments collected during the survey, though anecdotal, provided evidence that orders were increasing and that businesses had been bidding on projects, suggesting an increase in “soft” activity.

While it seems like economic recovery is on the horizon, financial executives expressed some concern over inflation and deflation and expected to face many challenges in the upcoming months. Over the next six months, 23% of respondents were concerned about the possibility of inflation and 15% about the possibility of deflation, fueled by uncertainty regarding government spending, the stimulus act and federal debt, the strength or weakness of the U.S. dollar, and fluctuations in commodity prices.

Customer demand remained the top challenge for respondents’ own organizations, a position it has held since the second quarter of 2008. But there was a shake-up as “access to capital/cost of capital” jumped to the second spot on the list of respondents’ top challenges, followed by employee health care costs. “Access to capital/cost of capital” was not among the top three challenges during the first quarter of this year.

“Last quarter, [access to capital/cost of capital] was behind collection of receivables and health care costs. If you look at the underlying data, it appears what happened was rather than credit tightening becoming more of a concern, receivable collection and health care costs became less of a concern,” said Lang. “Credit remains tight, but it is probably not getting any tighter. There’s a fair amount of evidence now in the news that suggests that, if anything, credit to business is getting slightly looser, but still remains quite tight.”

The survey, conducted between April 22 and May 5, includes responses from 995 CPAs in industry. Fifty-nine percent were CFOs, 30% were controllers, and 4% were CEOs or COOs. Sixty-five percent of respondents work for or work in privately owned entities, 14% for public companies, 12% for government, education and associations, and 6% for foreign-owned companies.

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