U.S. finance executives cool slightly about their own businesses

By Neil Amato

Optimists still outnumber pessimists by a wide margin, but overall sentiment among U.S. finance executives in business and industry is flat compared to this time a year ago.

The second-quarter Business & Industry Economic Outlook, released Thursday by the AICPA, shows less enthusiasm for the economy than the previous two quarters but an overall optimistic tone.

Six of the nine equally weighted indicators in the CPA Outlook Index (CPAOI) fell on a quarterly basis, producing an overall CPAOI of 72, the same measure as a year ago but a six-point drop from the fourth quarter of 2014. A reading above 50 indicates a generally positive outlook.

It’s the first time the CPAOI has fallen in consecutive quarters since the fourth quarter of 2012, when the index was 59. That was followed by eight consecutive quarters of the index’s rising or staying the same, to the post-recession high of 78 in the fourth quarter of last year.

Since the second quarter of last year, three key CPAOI measures have dropped: organization optimism, expansion plans, and revenue. Profit and IT spending projections are flat on a year-over-year basis, and index components for U.S. economic optimism, staffing, capital spending, and training rose slightly, according to the survey of 570 CPA decision-makers.

Optimists about the domestic economy outnumber pessimists more than 3.4 to 1, and organization optimists outnumber pessimists by about 4.7 to 1. But economic optimism dropped from 80 to 68 in the past quarter—the biggest quarter-to-quarter drop since 2011.

The survey comes as signs of economic sluggishness are percolating in the United States. On Friday, the U.S. Department of Commerce said that GDP decreased at an annual rate of 0.7% in the first quarter, revising an initial estimate that showed 0.2% growth.

In the AICPA survey, expansion plans dropped among most companies, notably those at both ends of the revenue spectrum. Fifty-three percent of companies with revenue of more than $1 billion have plans to expand in the next 12 months, compared with 66% a year ago. Among companies with revenue of less than $10 million, 47% have expansion plans in the next year, compared with 59% in the second quarter of 2014.

Bratton Fennell, CPA, CGMA, has guarded optimism about his company. Fennell is the CFO of Burroughs & Chapin Co., a real estate development firm in Myrtle Beach, S.C., which has annual revenue of about $100 million. The company’s core business is retail properties such as Broadway at the Beach, a massive restaurant, entertainment, and shopping center that caters to tourists.

That business is steady, Fennell said, with rent rising for tenants and occupancy rates high. But he has concerns about changing customer preferences and other factors’ cutting into Burroughs & Chapin’s growth. Data show that while more people are visiting Myrtle Beach, those visitors are spending fewer nights and spending less on shopping and entertainment.

As a self-described “paid worrier,” Fennell assesses risks that could affect the business but haven’t yet. He wonders if this year, with consumers seemingly more likely to hold on to their money, will represent a time of lower revenue for his company.

Hiring plans and top challenges

Burroughs & Chapin has several open positions, but the company doesn’t plan to increase staff beyond open positions in the coming 12 months.

That’s in line with the majority of survey respondents regarding hiring: 55% say they have the right number of employees, and 35% said they have too few employees. Of those that have too few workers, 60% plan to hire new employees. A year ago, less than half of those with too few employees said they would add more workers.

For the ninth consecutive quarter, the top challenge was regulatory requirements and changes, followed by employee and benefits costs, which moved up this quarter from third, ahead of domestic economic conditions. Paying for health care continues to be a concern, with finance decision-makers estimating costs will rise 5.8% in the next 12 months.

Other findings

  • Optimism among retail executives is up sharply in the past year, from 62% to 85%. Retailers also predict they will increase staff by 4.6%, up from a 1.9% projected rise in the second quarter of 2014. Wholesale trade optimism also rose, from 49% to 65%.
  • Optimism in the technology sector fell from 72% to 60% year over year; finance and insurance optimism dropped from 74% to 64% from a year ago; and smaller year-over-year dips occurred in the sectors of manufacturing, real estate, and construction.
  • More than half (53%) of respondents say that M&A activity is not a priority for their businesses now. Fourteen percent expect to make some kind of deal in the next year, and 15% are open to discussion about a deal but are not actively identifying opportunities.
  • Seventy-four percent of respondents say their companies do not plan to reduce corporate cash holdings in the next 12 months. Meanwhile, 5% say they plan to significantly reduce the amount of cash on hand.

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

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