Optimism Jumps Among Manufacturing Finance Execs

Amid widespread uncertainty regarding government actions, the real estate market and credit, CPA financial executives expect slow employment and economic growth, according to a survey released Tuesday and co-sponsored by the AICPA. However, the outlook for the beleaguered manufacturing sector brightened considerably from the fourth quarter of 2009.

Results from the Economic Outlook Survey Q1 2010, conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School, found that 25% of respondents were optimistic or very optimistic about the outlook for the U.S. economy for the next 12 months. Thirty-eight percent were very pessimistic or pessimistic and the remainder was neutral. These percentages were virtually unchanged from the previous two quarters.

“The CPAs who respond to these surveys are controllers and CFOs and who know where the economy is going. They know whether they’re selling more or spending more. They’re the people on Main Street USA,” said Carol S. Scott, CPA, AICPA vice president—Business, Industry & Government.

Continuing a trend seen over the past two years, respondents were more optimistic about their own organizations than about the U.S. economy as a whole. Optimism for respondents’ own organizations increased slightly this quarter: 44% were optimistic or very optimistic, and 24% were pessimistic, down from 30% in the fourth quarter of 2009.

There was a substantial increase in optimism among the 162 CPA financial executives in the manufacturing sector this quarter, with more than 56% saying they were “optimistic” or “very optimistic” about the economic prospects for their own organization over the next 12 months. Only 14% reported they were pessimistic, and 30% were neutral. The manufacturing sector recorded the highest level of optimism among all sectors. This is a vast improvement from a year ago, when optimism levels among manufacturing executives were the lowest among all sectors at 13%, and up from 39% in the fourth quarter of 2009. The least-optimistic respondents were from the construction and real estate sectors, of which only 26% and 30% were optimistic, respectively.

Supporting this increase in optimism among respondents in the manufacturing sector are plans for expansion—62% expect their businesses to expand over the next 12 months. Fifty-two percent said “expand a little” and 10% said “expand a lot.” Across all sectors, only 41% said their business would expand a little and 7% said it would expand a lot.

“It’s encouraging because manufacturing could be substantive driver in the economy,” said Mark Lang, a Kenan-Flagler accounting professor who analyzed the survey results. “I think part of the reason you’re seeing the strong bounce back in manufacturing is because inventory levels had been driven very low over the course of the recession. As we begin to see a pick-up in demand, firms are realizing they need to build their inventories. We have sort of a double effect. On the way down, it was a double effect on the negative side; now it’s a double effect on the positive. I’m cautiously optimistic that manufacturing will help lead this recovery.”

This quarter, respondents were presented with a set of questions regarding employment and proposed policies that may or may not encourage increased hiring and economic growth. CPA financial executives ranked easing restrictions on financial institutions lending to small businesses, simplifying regulations on small businesses, and offering tax credits for large capital investments the most important actions needed to generate economic growth and accelerate job creation. They ranked the three least important actions to be additional aid to states and localities to retain workers, additional federal infrastructure investment, and an expanded tax credit for energy-efficient retrofits.

“In reading specific responses, you get a strong sense that small businesses are very nervous about the size of the deficit and potentially higher taxes and inflation going forward. And so as much as they’re hurting for demand, they’d rather the government step back a little bit and let the recovery take over on its own,” Lang said.

Based on current conditions, respondents characterized their organization’s staffing situation, ranging from excess capacity to stretched resources. While a majority said they had approximately the appropriate number of employees (54%), nearly a quarter reported they had too few employees, but were hesitant to hire until further uncertainty was resolved. Fifteen percent said they had an excess number of employees, while 6% were planning to hire. Lang noted that employment was the weakest of all of the measures the survey looked at. “Employers are waiting until they see stronger signs of recovery before they engage in hiring activity,” he said.

Absent any government intervention, 28% of respondents expect it to take between 12 to 24 months for their organization’s employment to return to pre-recession levels, and another 29% said it was unlikely to happen in the foreseeable future. Small percentages of respondents expected to rehire at a quicker pace, with 3% anticipating it will happen in the next six months, and 5% between six and 12 months from now. More than 31% said employment at their organization did not decline during the recession.

Continuing a trend seen over the past year, the Corporate Expansion Index increased, from a low of 0.4 in the first quarter of 2009 to 0.57 this quarter. The Corporate Optimism Index increased to 0.55 after a slight drop in the fourth quarter of 2009. For a chart of COI and CEI values, which compare sentiment regarding economic outlook and expansion or contraction over time, click here.

Nearly 60% of respondents expect to wait until 2012 or later to see the U.S. economy return to pre-recession levels, while 35% expect recovery in 2011. Less than 4% expect the economy to rebound this year. But when it comes to expectations for when their own organization’s prospects will return to pre-recession levels, the timeline slightly shortens. Only 40% expect it to be 2012 or later until their organizations recover. Sixteen percent expect full recovery this year, while 34% predict it will happen in 2011.

Full survey results are available at fmcenter.aicpa.org. The survey, conducted between Jan. 27 and Feb. 15, includes responses from 998 CPAs in business and industry. Sixty-six percent were CFOs, 26% were controllers, and 4% were CEOs or COOs. Sixty-eight percent of respondents work for privately owned entities; 10% for public companies; 15% in government or education or for associations or nonprofits; and 4% for foreign-owned companies.

Video: Click here to see UNC professor Mark Lang and the AICPA’s Carol Scott discuss the results of the first quarter survey.

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