Summing up economic sentiment and concerns about inflation and tariffs

Sponsored by TaxConnex

Sentiment about the U.S. economy improved slightly — but not nearly enough to be considered a positive outlook — in the latest quarterly Business and Industry Economic Outlook Survey by the AICPA and CIMA.

For a breakdown of the results, the JofA podcast welcomed back Ken Witt, CPA, CGMA, associate director–Management Accounting Research & Development.

He discusses finance decision-makers’ views on tariffs and inflation and the 12-month projections for revenue and profit.

What you’ll learn from this episode:

• The “softening” related to domestic economic conditions — and why that’s not enough to overcome mainly negative sentiment.
• The percentage of executives who foresee a recession this year or next.
• Finance leaders’ approaches in response to tariffs.
• The top challenges beyond inflation facing survey respondents.
• How respondents feel about the state of the global economy.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: What’s the latest on U.S. economic sentiment and business sentiment? It’s not as bad as last quarter but still not very good. That’s the summary from a quarterly AICPA survey, and we’ll discuss the particulars of that survey in this episode of the Journal of Accountancy podcast. You’ll hear that right after this brief sponsor message.

This is Neil Amato with the Journal of Accountancy. Welcome back to the JofA podcast. I’m joined for this episode to discuss the third-quarter Business and Industry Economic Outlook Survey with Ken Witt, associate director–Management Accounting Research & Development.

Ken, I summarized the survey results in the intro. I’ll now turn it to you to say welcome back to the podcast. First, can you give me an overview of this quarter’s results?

Ken Witt: Sure, Neil, I think you hit it right on the head. This quarter, we’re seeing a bit of softening in the negative sentiment that dominated our first- and second-quarter findings, but we’re still pretty negative.

In terms of optimism, optimism about the U.S. economy rebounded from a low of 27% in the second quarter to 34% of our executives who say they’re now optimistic about the economy overall. The number who said they’re optimistic about their own-company prospects held steady at 37%, so improving but still just over a third optimistic about their own prospects.

In terms of expansion, those with expansion plans ticked up from 43% to 46%, and while we have nearly a third who told us they were contracting their business, that number ticked down two points this quarter from 30% to 28%.

What we heard from those who were optimistic about the economy is a bit of settling out of inflation, unemployment, and interest rate news, along with the positive effects of the tax bill. And on the downside, we still have concern about tariffs, trade wars, and policy volatility.

Amato: Speaking about some of that downside concern, tariffs in particular, there are some tariff-specific questions that have continued for a few quarters this year. What are people saying about tariffs, and what specifically are their concerns?

Witt: Yeah, we did begin to ask a few questions about tariffs in the first quarter of this year, and we’ve continued them each quarter. The first question was about the impact of uncertainty about tariffs on planning as we entered the year. While a bit less than half said that the impact was either moderate or significant in the first quarter, this ticked up to a full two-thirds in the second quarter. While this eased back to 58% in the third quarter, that’s still more than half of our execs who say they find the uncertainty around tariffs to have a negative impact on their planning.

We also asked about the primary impact of tariffs on their businesses. While only 5% or less say they expect a positive benefit from tariffs, two-thirds expect a negative effect, roughly evenly split between the impact of increased prices to consumers and increased costs in their supply chains.

Then we asked the follow-on question about how businesses are responding. Nearly a third are increasing prices, roughly a quarter are reducing their operating costs, and another 25% to 30% say they were exploring supply chain options. That’s the story on tariffs as we go into the final quarter of the year.

Amato: Again, those strategies to deal with tariffs: increasing prices, reducing operating costs, exploring other supply chain options. Those are all fairly common, but they are ranked in that order I just said them.

The R word, recession — some people maybe think we’re already in one. Some people are talking about the possibility of one coming. What’s the thinking on recession right now among the business and industry members?

Witt: In terms of recession, we ask two questions. We ask about the possibility of recession and then the potential extent of one. In the second quarter, we had 61% of our execs say they either thought we were already in a recession or expected one either by the end of 2025 or in 2026.

In the third quarter, this eased a bit, but we still have 54% say they expect a recession. For those who are expecting a recession, the majority think it will be moderate with an even split of those balanced between severe and mild. So, a majority expecting a recession, a little uncertainty about whether it’ll be severe or moderate or mild, some still saying it’s going to be severe when we get one.

Amato: Inflation went back into its somewhat familiar top spot on the list of challenges. It edged out domestic economic conditions. Tell me some about the other challenges below inflation.

Witt: I guess, as you said, those are the top two, and then following them, employee benefit costs and material supplies and equipment costs followed in the No. 3 and 4 [spots], so you got inflation impacts on those costs as well as the inflation itself. Domestic political leadership moved up another notch into the No. 5 slot.

Amato: You mentioned domestic issues. Let’s talk some about global issues. First, where are global economic conditions on the list of challenges, and second, what is the overall optimism about the global economy for the coming 12 months?

Witt: Last quarter, we saw the global economic conditions moved into the top 10. This quarter, there seems to be a little bit less of a concern, dropping out of the top 10 into the No. 11 spot. Optimism about the global economy also inched up four points, but still pretty grim, from 19% to 23%, a slight improvement this quarter.

Amato: The KPIs, I think, have also shown, if I’m accurate, just a slight improvement but slight improvement from some pretty weak numbers. How do you sum up some of those KPIs, revenue, profits, hiring, etc.?

Witt: I think you’re right. Nothing to get terribly excited about, but revenue improved, profit and spending both improved. Profitability was in the negative territory last quarter, and we’re seeing that tick just slightly positive this quarter.

On the hiring front, still just the need for employees and plans to hire will remain relatively constant. We still have some companies with excess employees and a good number that still need employees, and some of them remain hesitant to hire. Others just need to go ahead and get employees on board soon as they can, so remaining steady on that front.

Amato: In closing, with this survey, it is a forward look. It’s a projection of the coming 12 months. What do you look forward to from the next quarter’s survey?

Witt: I think the big thing is just going to see what the outcome of the tariffs taking hold will be on the economy and the outlook to our members. We just take that wait-and-see attitude again and see what happens.

Amato: This episode was recorded on Tuesday, Sept 2. The survey results are released Thursday, Sept. 4. We’ll have more coverage on journalofaccountancy.com. Ken Witt, thanks very much for being on the JofA podcast.

Witt: My pleasure, Neil.