U.S. finance executives upbeat in wake of tax changes

By Neil Amato

Large U.S. businesses have made headlines for the billions of dollars they plan to repatriate in response to changes in domestic tax law. Many small and midsize businesses are still formulating plans for potential tax savings. At the same time, financial decision-makers at those companies are showing previously unseen levels of optimism, according to a survey released Thursday by the Association of International Certified Professional Accountants.

The nine-component measure of economic sentiment, the CPA Outlook Index (CPAOI), again set a record for optimism, surpassing the December mark in the quarterly Business & Industry Economic Outlook Survey. The first-quarter survey of CPAs in business and industry, such as CFOs, chief accounting officers, and controllers, was conducted between Feb. 6 and Feb. 21. Their responses represented forward-looking sentiment concerning the 12 months following the survey period.

A CPAOI reading above 50 indicates positive sentiment. The latest CPAOI is 81. That’s two points higher than the previous quarter, with all nine components up at least three points year-over-year. The index dates to 2007.

Three performance indicators illustrate finance executives’ optimism:

  • Revenue: Projected revenue growth is 5%, the highest since 2007. The previous high was a quarter ago, 4.8%. At one point in the third quarter of 2007, before the global economy sank into recession, the projected revenue increase was 4.5%. The projection didn’t go above 4% again for seven years.
  • Profit: Also a survey high, profit for the 12 months ending February 2019 is projected to rise 4.4%. Until this quarter, the projection for profit growth had never reached 4%. The previous high was 3.9% in the fourth quarter of 2014.
  • Staffing: The amount of projected staff increases has risen or remained steady in seven of the past eight quarters. That projected additional headcount now averages 2.1%; it was 0.5% in the first quarter of 2016. The last time staff growth was projected to be higher was in the third quarter of 2007 (2.4%).

Some of that optimism is spurred by tax changes enacted by Congress in December. Half of respondents expect some increase to their earnings in the coming year because of tax changes. Specifically, 17% project an increase of between 5% and 10% on earnings, and 13% project an increase of between 3% and 5%. Thirty-six percent expect no increase or impact, 9% say they’re not sure about the impact of tax changes, and 5% predict a decrease in earnings.

Twenty-six percent say they have already taken steps to benefit workers as a result of tax savings, and 33% say they have additional plans to use tax savings to benefit employees in the coming 12 months. The top ways companies would deploy tax savings are:

  • Increase capital expenditures and business expansion spending: 29%
  • Pay down debt: 17%
  • Hire more full-time workers: 11%
  • Issue or increase dividends: 10%
  • Other (increase compensation and benefits, build cash reserves, and other plans): 23%

One finance decision-maker still waiting to see how tax changes will affect his company is Brett Anderson, CPA, the financial controller at ski and sportswear company Sport Obermeyer Ltd. The company was waiting to learn more about its tax position after its fiscal year ends on June 30. “Until all of the tax rules get interpreted, we’re kind of sitting on the sideline,” he said.

The company, based in Aspen, Colo., might be encouraged to make more capital purchases or increase headcount, he said.

Sport Obermeyer is not the biggest player in the ski apparel business — its annual revenue is $24 million — but it has a loyal, longtime following. The company, which was founded in 1947, does not sell direct to consumers, which it says enables it to maintain strong relationships with dealers. Anderson said revenue has grown between 8% and 12% annually the past few years because of increased sales. “Our dealers see when they put our product out on the floor that it’s selling” faster than competitors’ products.

Skiing is a discretionary-income sport, so business has undoubtedly been helped by a strong economy, but Anderson said the company also does well in downturns because people buy Sport Obermeyer equipment not only for sports but for warmth.

In South Carolina, one CFO does not expect to return potential tax savings to employees in the form of pay raises. Bratton Fennell, CPA, CGMA, said his company, real estate investment trust Burroughs & Chapin Co., already treats employees well. “In the last five years, we’ve had limited turnover of key personnel,” he said.

The company may use potential tax savings to further grow the company’s holdings or develop existing properties, Fennell said. Burroughs & Chapin owns shopping centers in several coastal cities in the Southeast.

Fennell is mildly optimistic about the future, saying that middle-class consumers will be critical to his company’s success. However, he echoed the sentiment of nearly half of respondents in the survey regarding a rising concern: inflation.

“When inflation rises, it can be a hidden tax,” Fennell said. “My fear is inflation hurting everyone’s spending power.”

Forty-nine percent of respondents said they view inflation as more of a risk than deflation over the next six months, up from 27% last quarter. The main inflationary risks cited among finance executives are labor costs, raw materials costs, and interest rate rises.

Other findings in the survey:

  • U.S. economic optimism reached 79%, and finance executives’ own-company optimism is at 71%.
  • Projections for IT spending increases have risen eight consecutive quarters and now stand at 3.7%.
  • Projections for increases in training spending rose to 2.4%, marking eight straight quarters in which the projection either rose or remained the same.
  • CPA decision-makers expect other capital expenditures to grow 3.9% in the coming 12 months. That’s an increase from 2.6% a year ago and 1.5% two years ago.
  • Among companies that have too few employees, a rising percentage now plan to hire. In the first quarter of 2017, 22% planned to hire versus 16% who said they were hesitating to do so. This quarter, 27% plan to hire, and 14% say they are hesitating.
  • Availability of skilled personnel and domestic competition are the top two challenges, the same as the previous quarter. Regulatory requirements and changes dropped to fourth on the list, the first time it has been outside the top three challenges since 2010.
  • First-quarter optimism in the manufacturing sector is at 77%, up from 48% two years ago. In retail trade, optimism grew from 38% in the first quarter of 2017 to 66% now.

— Neil Amato (Neil.Amato@aicpa-cima.com) is a JofA senior editor.

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