CPAs sour on U.S. economy as election nears

After rising significantly at the end of 2011 and the beginning of 2012, CPA business leaders’ optimism over the U.S. economy has faded substantially in recent months, according to the latest AICPA Business & Industry Economic Outlook Survey.

With an uncertain political environment in the run-up to the Nov. 6 election, CPA executives participating in the survey have soured on the economy. The percentage of respondents who reported optimism about the U.S. economy dropped 12 percentage points from the previous quarter to 22% in the third-quarter survey, which was released Thursday.

That is far higher than the 9% who identified themselves as optimistic a year ago, when 61% said a double-dip recession was somewhat or very likely. But it is also down significantly from the first quarter this year, when 43% of respondents were optimistic about the economy.

“People are very cautious about what’s going to happen in the next 12 months,” said Jim Morrison, CFO of Pawtucket, R.I.-based materials science company Teknor Apex and chairman of the AICPA’s Business & Industry Executive Committee.

Declines in optimism from the second quarter of 2012 were observed in virtually every measure. The CPA Outlook Index, a broad indicator that is the composite of nine individual economic measures, dipped to 63, down from 67 in the previous quarter and 69 in the first quarter of 2012. Each of the individual indicators in the index, including expansion plans and forecasts for revenue, profits, and additional employment, also dropped.

Concerns were reflected in just about every indicator measured in the survey:

• Those indicating that they have too few employees and are planning to hire fell three percentage points from the previous quarter to 9%. The average percentage by which respondents expect their number of employees to increase in the next 12 months was 0.8%, the lowest number since the fourth quarter of 2010.
• The average expected changes for the next 12 months in revenue (up 2.6%) and profits (up 2.2%) dropped to their lowest marks since the third quarter of 2011.

Morrison said the hiring forecast continues to be especially disappointing and is fueling some of the negative feelings about the U.S. economy. He said companies have slimmed down and increased productivity since the recent recession, but are reluctant to hire.

“Companies are doing quite well today,” he said. “Profits have been good the last few years. But I don’t think corporations are going to go out and hire a bunch of people when there’s still uncertainty on the horizon.”

Decreases in optimism from the previous quarter were observed in every geographic region, and optimism in each industry sector measured either dropped or stayed the same. Spending plans for IT, other capital, training, marketing, and research and development all fell from the previous quarter.

Technology and construction showed the sharpest declines in optimism, while manufacturing and real estate were the most optimistic industries.

Optimism about CPAs’ own organizations fell 10 percentage points from the previous quarter to 44%. That’s just three percentage points higher than the third quarter of 2011.

Asked about their current liquidity position, roughly 35% reported having more capital than needed and 44% said their liquidity level was about right.

Presidential impact

With the U.S. presidential election just two months away, the political environment appears to be having an increased impact on CPAs’ economic outlook. Survey respondents said the third-largest challenge to their organization is domestic political leadership, which has steadily risen on the list of challenges since the fourth quarter of 2011. Political leadership outpaced employee and benefits costs as a top challenge.

“Obviously, the election is weighing on a lot of people’s minds,” Morrison said.

The top two challenges—domestic economic conditions, followed by regulatory requirements and changes—have been unchanged in each of the last four quarters.

A majority of respondents (54%) said the highly charged political atmosphere in Washington will not change for the better next year after the election. The remaining respondents are evenly divided between those who think the atmosphere will improve and those who are unsure.

The overall opinion on the sequestration budget cuts was almost evenly divided between those who say repealing the cuts would increase optimism (35%), those who say it would decrease optimism (32%), and those who say it would neither increase nor decrease optimism (33%). In the first quarter of 2012, 21% said repealing the cuts would increase optimism while 43% said it would decrease optimism. Support was strong for the extension of the “Bush-era” tax cuts, with 75% saying an extension would increase optimism. That’s up from 64% in the first quarter of 2012.

Given two options—comprehensive tax reform or modifications to the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148—52% said that tax reform would have the more positive impact on their outlook. Thirty-seven percent chose modifications to the PPACA, and 11% chose neither.

The responses of 1,365 CPA decision-makers in business and industry between Aug. 15 and Aug. 30 are reflected in the survey.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.