Economic Outlook Turns Optimistic

For the first time in more than two years, CPA financial executives were more optimistic than pessimistic about the outlook for the U.S. economy, according to a quarterly survey conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School, but more than half don’t expect full economic recovery until 2012 or later, and 42% are now concerned about inflation.

Results from the AICPA/UNC Kenan-Flagler Business & Industry Economic Outlook Survey Q2 2010 found that 40% of respondents were optimistic or very optimistic about the outlook for the U.S. economy for the next 12 months. This is up from 25% who showed optimism during the first quarter of 2010, and a significant increase from record-low levels of 5% optimism in the first quarter of 2009. This quarter, 25% were very pessimistic or pessimistic, down from 38% last quarter, and the remainder were neutral.

The survey, conducted between April 13 and May 2, includes responses from 1,768 CPA executives in business and industry.

This quarter also marked the first time in more than two years that more than half of CPA financial executives were optimistic about economic prospects for their own organizations, with 51% reporting they were optimistic or very optimistic. Twenty percent were pessimistic or very pessimistic, and 29% were neutral. Optimism levels increased 7% from the first quarter of 2010. This also continued a trend seen in the survey results over the past two years, where respondents are more optimistic about their own organizations than the U.S. economy as a whole.

“Our latest survey shows a significant shift toward optimism among our CPA members serving in executive positions in business, industry and government,” said Carol Scott, CPA, AICPA vice president–Business, Industry & Government. “These results should be taken as a very positive indicator. As financial executives charged with running companies and meeting payrolls, CPAs are on the front lines in this economy, and their views on the direction of business conditions are well informed and sophisticated.”

Emerging as a trend to watch this quarter was concern about inflation: 42% of respondents were concerned about inflation over the next six months, up from 32% last quarter and 23% a year ago. However, this concern was not matched with a significant increase in expectations of paying or charging increased prices in the next 12 months.

Looking at the outlook for respondents’ own organizations by industry segment, optimism was most prevalent among respondents in technology (64%), wholesale trade (64%) and manufacturing organizations (61%). Pessimism continues to be strongest among companies in the construction (36%), health care provider (33%) and real estate (32%) sectors. Interestingly, after the passage of health care reform on March 25, health care providers were the one industry segment where optimism remained flat—all other sectors saw an increase in optimism.

Despite a noticeable improvement in optimism about prospects for their own companies, most respondents still believe recovery will be slow. Nearly two-thirds of financial execs don’t see the U.S. economy returning to pre-recession levels until 2012 or later. Thirty percent expect recovery in 2011, and 2% thought activity would rebound this year.

Continuing a trend seen for more than a year, the Corporate Expansion Index (CEI) increased from a low of 0.4 in the first quarter of 2009 to 0.6 this quarter. The Corporate Optimism Index (COI) also increased, from 0.55 in the first quarter of this year to 0.59. The COI and CEI were calculated by using responses to survey questions regarding economic outlook and expected expansion or contraction of respondents’ own organizations. The measures assigned a value of 0.5 to neutral, 0 to very pessimistic, 0.25 to pessimistic, 0.75 to optimistic and 1 to very optimistic, corresponding to expansion/contraction as well. For a chart of COI and CEI values, which compare sentiment regarding economic outlook and expansion or contraction over time, click here.

“Overall, this is the best news we’ve had in a long time. Corporate optimism and expansion expectations continue to improve and are close to levels last seen two and a half years ago prior to the start of the recession. Optimism is broad-based with only construction remaining pessimistic overall, but even there we are seeing improvements,” said Mark Lang, CPA, a Kenan-Flagler accounting professor who analyzed the survey results.

Full survey results are available at aicpa.org. Sixty-two percent of survey respondents were CFOs, 29% were controllers, and 4% were CEOs or COOs. Sixty-four percent of respondents work for privately owned entities; 13% for public companies; 15% in government or education or for associations or nonprofits; and 6% for foreign-owned companies.

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