Inflation worries and a tight labor market lead to a slight dip in optimism

Although finance executives continue to be bullish about their organizations’ economic prospects, inflation and a difficult labor market are causing concern in the CPA Outlook Index in the AICPA Business and Industry Economic Outlook Survey. Ken Witt, CPA, CGMA, takes a closer look at the findings and what they mean for companies. Also, Ebonie Jackson, CPA/CITP, CGMA, shares insights on how finance professionals and accountants can lead strategic change from her recent case study.

Also, you’ll hear the findings from the latest CPA Firm Top Issues survey, and we’ll update you on the latest from the Shuttered Venue Operators Grant program.

What you’ll learn from this podcast:

• Why a tight labor market is dampening optimism and what some companies are doing to deal with it.
• Where finance executives see bright spots in the economy.
• How finance professionals and accountants can spearhead strategic change within their organizations.
• Why being a CPA is a strategic advantage.
• What CPA firms are most concerned about now.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.

Transcript:

Drew Adamek: The third quarter AICPA Economic Outlook Survey shows a slight decline in optimism as inflation worries and a tight labor market concern business leaders. This week, Ken Witt takes us on a deeper dive into the numbers. Then I’ll talk to Ebonie Jackson about her recent case study exploring how CPAs and finance leaders can spearhead strategic change in their organizations.

And later in the show we’ll take a look at the results of the CPA Firm Top Issues Survey and the extension of the Shuttered Venue Operators Grant program.

But first, a word from our sponsor.

Adamek: Welcome to the Journal of Accountancy podcast. I am senior editor Drew Adamek. Every quarter, the AICPA polls its members in business and industry on forward-looking economic sentiment. Ken Witt, a CPA who holds the CGMA designation, is our in-house expert on that survey. He’s a senior manager for management accounting and member engagement and a repeat guest on this podcast.

This quarter’s Economic Outlook survey shows a slight decline in optimism from last quarter’s significant highs with inflation and labor concerns at the front of members’ minds.

I spoke to Ken about whether the slight dip in optimism is a cause for concern, how inflation fears are shifting, and the labor pressures organizations are facing.

Ken, thank you so much for joining us.

Ken Witt: Sure, Andrew, good to be here.

Adamek: After a surprising boost in optimism in your last survey, this most recent one shows a slight decline. What do you attribute this decline in optimism this quarter to, and does this concern you at all?

Witt: We’re seeing a fair decline this quarter from where we were last quarter, but those were, I think, record high levels of optimism. But in terms of our overall CPA outlook index, it’s only sort of eased off from 78 to 75, while optimism about the U.S. economy declined from 70 to 64 and some organizational metrics also declined from those high Q2 levels.

What we’re seeing is that employment, IT spending, and training spending are all up. So on an organizational level that’s still some confidence in their own businesses. What we did here, our members say in support of their decline in optimism, was that they basically have a two-prong concern about stimulus spending overheating the economy and the difficult job market.

I think those are the two things that that really drove the decline in optimism. And as we have always seen, there is always a difference between the optimism about the economy overall and optimism in our respondents’ organizations. And so while the optimism about the economy declined from 70% to a little over 50%, nearly two-thirds of executives continue to be optimistic about their own organizations.

Adamek: However, inflation still seems to be a concern, but it appears to have shifted. Where are you seeing concerns about inflation appear now?

Witt: I think we’re seeing that in most industry sectors, and as you indicated we do ask a question about just the overall concern about inflation, but we also drill down into what the source of the concern is. And we did have a shift this quarter from concern about raw material costs that we were seeing last year, and this year we’re seeing the primary concern being increase in labor costs.

Adamek: Hiring still seems to be a considerable challenge for a lot of organizations. What are you seeing and what are companies doing to address this concern?

Witt: Hiring is a big concern. We have our list of challenges and availability of skilled personnel continues to top the list for companies. Turnover and employee-related costs are also in the top ten, and what we also saw this quarter is that salary and benefit costs are now expected to increase at a rate of 33.7%, which is at a higher rate than we’ve seen any time since pre-recession economy. So people are really kind of resorting to having to pay more salaries, higher salaries, more benefits. And on an overall basis, over half of our executives say their companies need more employees.

Fortunately, what we’ve seen sort of during the post-recession times was that people remained hesitant to hire, but of the 54% of executives that say they need more employees, only 14% are hesitant to hire and the majority, 40%, are planning to go ahead.

On a positive note I would say is that where we’re continuing to see hiring in the hospitality and entertainment sector, which includes travel, continuing their rebound that started last quarter. They are a sector that really got hit hard by the pandemic.

Adamek: What were members saying as what they see as positive in the economy now?

Witt: There are a number of positive things in the economy. Our members are usually more apt at expressing their concerns because that’s sort of the role that they have, they’re sort of in a position to worry about where their company is going and what they need to be on the lookout for.

But many of them are really encouraged by the strength of the consumer spending and appetite and the amount of resources that consumers have available and are willing to spend. So that’s a positive sign.

And real estate also continues to be strong. The construction industry is one that has benefited from that. Some of those really key sectors — retail, construction, manufacturing — there’s strength in hiring there, and that’s very encouraging across the board.

Adamek: Ken, thank you so much for joining us.

Witt: You’re welcome. Thank you for having me.

Adamek: For CPAs and finance professionals of all types the pace of change is accelerating. The last two years have seen significant economic, social, political, and business disruption. Many organizations have had to adjust their strategies on the fly.

For Ebonie Jackson, CPA/CITP, CGMA, the CFO and director of administrative services for the Lucas County Children Services in Ohio, a major funding change created the opportunity for her organization to shift its strategic priorities.

Jackson, winner of an Outstanding CPA in Government award, writes about how she and her organization seized on that opportunity in a recent AICPA case study called “Using Strategic and Finance Leadership to Improve the Lives of Children.” You can find that study linked in our show notes.

Here’s an excerpt of my conversation with Ebonie from an upcoming Journal of Accountancy podcast about how CPAs and finance professionals can drive strategic change within organizations, how to jump-start strategic initiatives, and why being a CPA is so valuable when leading transformations.

Adamek: What was the big change that allowed you to start thinking about a different strategic direction for your organization?

Ebonie Jackson: For this we really had the Family First Prevention Services Act of 2018, so it’s a little bit over two years ago, but that’s what really got us thinking differently when we did our planning. That is because it changed totally the way that we do funding for child protection. And so anytime you change the funding stream or how the funding stream operates, you really have to make sure that you’re really strategically aligned with that. So in foster care we had really been aligned with placing them in foster care or placing them in some type of institution.

Strategic direction change was to place them with kin. Now we could actually get paid from the federal government for placing them in with kin, so that was a huge switch for us. So it changed the game on having a funding source that would be more unlimited.

Adamek: Once the decision was made to start moving in a new strategic direction, what was the first step that you took once that decision was made to act?

Jackson: Well, what we did is a strategic plan. We got the board together, and the board had a board retreat to kind of reimagine what child protection would look like. So we did some ideation and kind of said, OK, if we had a blank piece of paper, what would we want to do, and what would we want people to say that Toledo looked like because of the child protection agency?

So what we said is that we really wanted people to be able to say this is a great place to raise a family, because we have supports in the community that teaches us how to do things with our children and how to keep them safe. And so that would be the big overarching goal. So we literally had a retreat that we talked through that and then again, as I said, we figured out how we could — I guess we have soft objectives. They weren’t all the way strong and beautiful like they are in the strategic plan. But we definitely started that visioning session, and I think once you get your leaders together, envision what the future can be, that’s when you can start going that direction by making clearer objectives. So the first part is just imagining and having fun.

Adamek: How did your accounting training prepare you for this challenge?

Jackson: I think you tried to trick me. No, actually my accounting background really prepared me for this challenge, because it gave me a way to operationalize a role. So our challenge was that everything was changing in the way we funded. To somebody it might just look like a lot of words and new legislation and all these different boundaries if you’re looking at it from a nonaccounting way.

But for me, I could basically translate what the new role was saying because I had been looking at things like the compliance supplement and looking at a lot of the technical accounting stuff for a long time. And so that base made it easy for me to translate this to my actual peers.

So my peers are all social workers, right, and they’re not going to be all into, like what is the Department of Health and Human Services going to tell us? They’re going to say how is practice going to be changed? So knowing the accounting piece and knowing how we can fund that change in practice was huge. One of the things that we did was take the funding sources and just align them to the new practice changes.

And so we said, OK, well, now we’re going to get more money to keep families together. So is this the way we’re going to message when we go to the taxpayer to ask them to have children’s services tax, which we call a levy? Is that going to be aligned? So we kind of aligned all the messages and because it was a financial message, knowing how to speak financial concepts and making them into layman’s terms was very helpful.

The other thing that was really helpful with the accounting was to know where there was other funding sources in the federal government that would also support it. I think that was really huge for us to be able to be on the same page as that. Having that accounting knowledge, knowing how budgets work, knowing how funding is advocated for and then being able to tell that to the board and getting the board to understand the risk of going this way or the upside of going this way, it was really helpful. It was more like the glue.

The practice stuff, all the fun, sexy stuff that you get to do, but actually how do you work with the families, and how do you do that practice-wise? You can’t do that unless you have the money. So I think that having that message and putting that in a pretty cohesive message to the public and to our legislators and was very, very helpful.

Adamek: You’ve been listening to an excerpt of my conversation with Ebonie Jackson. For more of my conversation with Ebonie, please visit the Journal of Accountancy podcast website in September.

In other news, finding qualified staff continues to challenge CPA firms this year, according to the 2021 AICPA Private Companies Practice Section (PCPS) CPA Firm Top Issues Survey. Hiring staff emerged as the No. 1 issue affecting firms that employ six or more professionals.

The survey also found that staying current with COVID-19 relief programs such as the Paycheck Protection Program (PPP) was the top concern of firms employing two to five professionals, and was a top-three concern for firms of all sizes.

Keeping up with tax law changes was sole practitioners’ top concern this year. Since 2011, this has been the No. 1 concern of sole practitioners every time the survey has been conducted.

The U.S. Small Business Administration’s Shuttered Venue Operators Grant program entered the supplemental phase this week. The agency said in a news release Aug. 27 that it would begin sending invitations for supplemental SVOG awards, which are to be provided to live entertainment venues and other entities that received an initial grant and reported at least a 70% reduction in 2021 first-quarter revenue as compared to the same period in 2019.

Since opening in April, the SVOG program has awarded around $9 billion in grants to more than 11,500 organizations that suffered revenue loss due to restrictions on public gatherings imposed to limit the spread of COVID-19.

For more on these stories, please click the links in the show notes or visit journalofaccountancy.com.