Economic Optimism Drops Among CPA Financial Executives
Unemployment and increasing debt and energy prices have CPA financial executives more pessimistic about U.S. economic prospects and increasingly concerned about inflation, according to results released Thursday from the AICPA Business & Industry Economic Outlook Survey Q2 2011.
One-third of respondents were optimistic or very optimistic about the U.S. economic outlook for the next 12 months, down from nearly 50% in the first quarter of 2011. Overall pessimism increased this quarter, with 27% of respondents reporting they were very pessimistic or pessimistic about the U.S. economy, up from 18% last quarter. The remaining 40% of respondents were neutral.
Optimism for respondents’ own organizations dipped this quarter as well, but not as dramatically as optimism for the U.S. economy.
Overall, 54% were optimistic or very optimistic about economic prospects for their own organizations over the next 12 months, down from 57% in the first quarter of this year. Seventeen percent were pessimistic or very pessimistic about the prospects for their own organizations, and 29% were neutral. By industry, CPA executives in the technology and retail trade sectors were the most optimistic, while those employed by health care providers and construction companies were the most pessimistic about their organizations’ prospects.
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 declined slightly from 0.69 in the first quarter of 2011 to 0.66. Driven primarily by a drop in optimism for U.S. economic prospects, it gave back approximately half of last quarter’s gain. Decreased expectations for expansion and growth in revenues and profits also contributed to the minor decline.
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. Click here for a full description of the CPAOI, including the measures used in the index and how each component is calculated.
“The flush of optimism we experienced earlier this year has given way to more moderate expectations for the U.S. economy,” said Carol Scott, AICPA vice president–Business, Industry & Government. “While the CPA Outlook Index is still positive relative to the dark days of the recession, our members are concerned about rising energy costs and inflation, health care costs and continuing weakness in demand.”
Concerns about inflation continued to rise this quarter. Sixty-one percent indicated they are concerned about the possibility of inflation for their business over the next six months, up from 55% in the first quarter of this year and nearly double the percentage of respondents who were concerned about inflation at the end of 2010 (34%). Four percent were concerned about deflation, and the remainder were not concerned about either (27%) or were unsure (7%). Rising raw materials costs remained the primary concern for respondents, with 32% considering it the most significant risk to their business, but concerns about energy costs are rising (up to 25% from 18% in the first quarter) and passed interest rates (20%) as the second most significant risk.
Employment, Performance Indicators and Challenges
The survey indicates that plans for employment and hiring are muted. Twelve percent of respondents said they had too few employees and were planning to hire in the immediate future, which is up from 8% in the second quarter of 2010 but unchanged from last quarter. The respondents who said they did not have enough employees but were hesitant to hire increased slightly to 21%. More than half said their organization has the appropriate number of employees.
By industry, respondents from the technology, health care (nonprovider) and manufacturing sectors expected the largest increases in hiring. Overall, 25% of respondents expected their organization’s number of employees to increase less than 5%; 9% expected 5% to 10% growth; and 6% expected more than 10% growth.
CPA financial executives’ expectations for growth in other performance indicators, including revenue and profit growth, declined slightly this quarter but remained higher than the levels recorded in 2009 and 2010. More than two-thirds said their organization expected an increase in total revenue over the next 12 months (68% vs. 72% in the first quarter), but just 57% expected total profits to increase, down from 62%. On the other hand, 21% expected revenue to decrease, while 27% expected profits to decline.
The top three challenges for organizations remained unchanged for the fifth straight quarter, with customer demand, employee health care costs and regulatory requirements ranked, respectively, as the top three challenges. A new challenge added to the survey options last quarter, economic and political instability, remained as the fourth greatest challenge, followed by materials, supplies or equipment costs.
Containing Health Care Costs
In this quarter’s survey, 44% of CPA financial execs expected their organization’s health care costs to increase more than 8% over the next year. With numerous reports indicating that costs for health care benefits will continue to increase, respondents were asked a series of questions about their organization’s plans to contain health care costs. Respondents said their organizations were considering various options to contain health care benefits costs, including increasing employee contributions (45%), increasing copays, coinsurance or deductibles (40%), and modifying or restructuring health care plan offerings (31%). Nearly one-quarter said they would absorb the extra costs, and 12% were unsure what action their organization would take.
In response to the Patient Protection and Affordable Care Act of 2010, which included a requirement to cover dependents up to age 26, only 22% said their organizations would restructure their employee contribution for dependent coverage. Nearly half of those that are restructuring (49%) are changing from a family or employee-plus-children structure to a per-dependent structure; 14% plan to tier costs based on the age of dependent children; and 6% will eliminate coverage for dependents. The remaining 31% are looking at a variety of other options.
The perspectives of a panel of CFOs and key CPA decision makers on business expansion and hiring plans, revenue and profit expectations, and health and benefit plan design issues will be featured in a webcast scheduled for June 8 at 2 p.m. EDT. More information about the “Managing for Growth in a Slow Growth Economy—CPA/CFO Viewpoint” 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. The survey, conducted May 11–26, includes responses from 1,093 CPA financial executives in business and industry. Fifty percent of survey respondents were CFOs; 20% controllers; 13% CEOs or presidents; and 10% vice presidents or COOs. Sixty-eight percent of respondents work for privately owned entities; 13% for public companies; 13% in government or education or for associations or nonprofits; and 4% for foreign-owned companies. Nine percent came from organizations with annual revenues of $1 billion or more; 21% from organizations with $100 million to under $1 billion; 46% 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:
