Finance decision-makers at businesses remain confident overall in their own organizations and in the domestic economy, but overall economic sentiment dropped for the third quarter in a row, according to a new survey.
The decline, though small, represents a different mood than a year ago, when the outlook was improving for their companies. The third-quarter Business & Industry Economic Outlook Survey, released Thursday by the AICPA, shows overall business expansion plans, as well as revenue and profit projections, down from the third quarter of 2014.
Survey results help to form the CPA Outlook Index (CPAOI), a measure of nine equally weighted components. The CPAOI is 71, four points lower than a year ago and seven points off the post-recession high reached in the fourth quarter of 2014. An index rating above 50 indicates a positive outlook.
In the third quarter of 2014, 55% of all businesses expected to expand some, and 13% expected to expand a lot in the following 12 months. This year, however, 50% expect to expand some in the next year, and 10% expect to expand a lot. A year ago, 31% expected to contract a little or remain the same. This year, 37% expect to contract a little or stay the same.
Large businesses are the least likely to expect to grow, with 56% of those with revenues exceeding $1 billion predicting expansion in the next year. That’s down from 71% in the third quarter of 2014. Midsize businesses are also less likely to project expansion. The smallest businesses—those with revenues of less than $10 million—are expected to expand more compared with a year ago (61% vs. 59%).
Other highlights from the survey:
- Regulation remains the top challenge, according to respondents, followed by employee and benefits costs and availability of skilled personnel.
- Respondents predict revenue to grow 3.3% in the next year, down from 4.4% growth in the third quarter last year. Projected growth in profits is down to 2.6%, from 3.6% a year ago. However, profit and revenue projections are up slightly from the second quarter.
- The rate of projected 12-month spending for IT, training, and other capital expenses is down from a year ago.
- Respondents predict health care costs to rise 5.8% in the next year, down from 6.6% a year earlier.
- Optimism in the manufacturing sector is declining, even though hiring in that sector is projected to increase 3.8% in the next 12 months. The level of optimism a year ago was 72%. In the third quarter of this year, it is 53%. Optimism in the technology sector, at 58% a year ago, is at 67% this quarter.
About the survey and the CPAOI
The survey measured the sentiment of 1,440 high-ranking finance professionals in business and industry—mainly CEOs, CFOs, and controllers—in nine areas: economic optimism, organization optimism, expansion plans, revenue, profits, employment, IT spending, training and development, and other capital spending.
Each component of the CPAOI is calculated by taking the percentage of respondents who indicated that their opinion or expectation for the metric is positive or increasing and adding to that half of the percentage of respondents indicating a neutral or no-change response.
For example, if 60% of respondents indicate an optimistic or very optimistic view and 20% express a neutral view, the calculation of the component indicator would be 70 (60% + [0.5 × 20%]).
—Neil Amato (email@example.com) is a JofA senior editor.