CPAs continue to forecast storms ahead for U.S. economy

Economic optimism, which started the year on an upswing, has fallen to a 12-month low, according to the latest AICPA Business & Industry U.S. Economic Outlook Survey, which was released Thursday.

A big reason for the gloomier mood: Washington.

“The overwhelming majority of comments this quarter focused on the fiscal cliff and government or politics,” said the report, which polled CPAs who hold executive positions in companies across an array of industries. “Pessimists were most concerned about government policies and inability to get things done, particularly with the fiscal cliff, the results of the election and the level of government debt, deficits and spending.”

Only 21% of the 1,668 qualified respondents indicated that they were optimistic or very optimistic about the U.S. economy in the next 12 months, down from 22% in the previous quarter. During the same period, however, respondents who were once neutral became more pessimistic. Forty-nine percent of respondents were pessimistic about the next 12 months, up from 40% in the third-quarter survey.

Economic optimism is one of several indicators that make up the CPA Outlook Index, which fell to 59—the lowest point since the third quarter of 2011. A score of 50 or more is generally considered positive. But the index dipped as each of its components—economic optimism, organizational optimism, expansion plans, revenue, profits, employment, IT spending, other capital spending, and training and development—hit a 12-month low.

And for the first time in the past three years, the decline in optimism for organizations and expansion plans exceeded the decline in optimism for the U.S. economy.

“It appears that the US may be heading for another year of slow, struggling growth that may be even less robust than the weak growth seen in 2012,” the report said.

Climate in Washington

Respondents are not hopeful that much will change in Washington. Political wrangling over the fiscal cliff is a big reason for the pessimism noted in the survey, which was conducted after the Nov. 6 election. The election didn’t yield any major power swings in the legislative and executive branches, and some CPA decision-makers are not certain Congress will enact comprehensive tax reform to avoid the fiscal cliff, which includes about $600 billion in tax increases and spending cuts that go into effect on Jan. 1.

Jim Morrison, the CFO of Teknor Apex, a Rhode Island materials science company, said the election did little to change the “psyche” of executives—a sentiment that was foreshadowed by surveys conducted before the election. He thinks a short-term fix of several fiscal cliff issues will occur, but that’s not much to believe in.

“If we get out of the fiscal cliff and they kick it down the road for three to six months, they’re not going to come up with a brand-new, four- or five-year plan to revamp the tax code within a month,” said Morrison, the chairman of the AICPA Business & Industry Executive Committee (BIEC). “But even a short-term solution to the fiscal cliff is not going to be enough for companies to actually feel confident about investing in the economy.”
 
Combine that sentiment with a projected increase in health care costs – in the survey, 42.5% of CPAs expect their costs to rise 8% or more, whereas only 37.5% predicted that rise in the third quarter—and it’s easy to see why businesses remain cautious, even knowing the election results.

“Businesses do very well when they know what they’re dealing with, whether they agree with it or they don’t agree with it,” said Jim Blake, CPA, CGMA, the CFO of Morey’s Piers in Wildwood, N.J., and a member of the BIEC. “I think the lack of certainty has really caused people to sit on the fence, not invest dollars to be able to grow the business, and not be able to hire employees. They’re not willing to take that risk until they know clearly the environment they’re going to be working with.”

The survey asked respondents about “the highly charged” political environment. Seventy-four percent don’t expect that to change in the next year, up from 54% the previous quarter.

Additionally, CPA executives mainly favor options that call for more spending cuts than revenue increases to address the federal deficit and debt. Forty-five percent favored spending cuts and revenue increases with more cuts than increases. Twenty-three percent wanted primarily spending cuts, and another 23% wanted a balance of cuts and increases. Just 7% favored spending cuts and revenue increases with more increases than cuts, and 1% wanted primarily revenue increases.

—Neil Amato (namato@aicpa.org) is a JofA senior editor.