Breaking down the reasons for a decline in economic sentiment

For several reasons, including persistent inflation and concern about the effects of tariffs, CPA decision-makers in business and industry are less optimistic this quarter about the U.S. and global economy and their own businesses.

That’s according to the Economic Outlook Survey released on Thursday. On Friday, Ken Witt, CPA, CGMA, AICPA & CIMA associate director–Management Accounting Research and Development, joined the Journal of Accountancy podcast to analyze the survey’s latest results.

In the fourth quarter of 2024, Witt said, the likelihood of less regulation was one reason for an increase in sentiment. But much of that November enthusiasm has been tempered.

What you’ll learn from this episode:

• The top challenge for CPA decision-makers’ businesses (it’s not a surprise).
• The difference in expansion plans based on company size.
• The percentage of respondents who expect tariffs to have a negative effect on their organizations.
• What finance executives project related to hiring in the coming 12 months.

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: We’re talking economic sentiment on the Journal of Accountancy podcast today, specifically the sentiment among CPA decision-makers in business and industry. I’m Neil Amato, your host and a JofA news editor. We’ve got more insight on the quarterly Economic Outlook Survey released by AICPA & CIMA last week. Ken Witt is our survey guru. His official title is associate director–Management Accounting Research and Development. First, Ken, welcome back to the podcast. What’s the overview of the survey, which was in the field with respondents in February?

Ken Witt: Thanks, Neil. I think last quarter, you recall we launched the survey on the day following our elections, and the results reflected a fair amount of enthusiasm about the change in the administration at that time. Optimism about the economy had rebounded from a third-quarter fall-off, and optimism about company prospects and expansion plans followed suit, gaining some ground. Domestic political leadership at that time, which had been in the top 10 challenge list for most of 2024, disappeared from the list in Q4. This quarter we’re seeing the tempering of that enthusiasm, primarily centered on concern about tariffs, with domestic political leadership returning to the top 10 challenges list in the No. 6 spot.

Inflation also continues to be a concern, maintaining its hold on the top spot of the challenge list. So that’s the overview. Optimism about the U.S. economy dropped 20 points from 67% to 47% of our executives now saying they’re optimistic about the economy, and optimism about the global economy also took a hit, falling from 41% to only 29%. Fortunately, organization optimism eased only slightly, from 53% to 50% of our respondents being optimistic about their own company’s prospects. Similarly, the percentage of companies with expansion plans held constant at 57% overall.

While there is a bit of a decline in the percentages for smaller companies, 81% of our companies with revenues in excess of $1 billion say they have plans to expand their business, perhaps a bit comforting after the spate of layoffs that captured the headlines in 2024.

Amato: Thank you for that rundown. It touched on a lot of things: global sentiment, also own-company optimism. I want to go first to one thing you mentioned, which is tariffs, the impact of those.

First, we have to couch any discussion of tariffs by saying things are changing almost by the hour. They probably will continue to change between our recording time on Friday, March 7, and publication date. But when respondents were asked in February, what was their sentiment about the impact of tariffs on their businesses?

Witt: Yeah, sure. This was something we thought was coming. We always ask topical questions in our survey, we call it our survey within the survey, and this quarter, we asked two questions about tariffs at the time. The first question was about the impact of uncertainty about tariffs on business planning.

When we launched the survey and while it was open during February,18% said the impact of uncertainty about tariffs was significant, another 31% said it was moderate. An additional 36% said tariff uncertainty was having at least a minor impact on their planning. We only had 15% said that the impact on their planning was insignificant. That was just about the uncertainty about tariffs at the time.

Then we also asked a drill-down question into what executives actually thought the impact of tariffs would have on their business. In response to that question, only 14% expected tariffs to have a positive impact on their business by increasing costs of competing products. Twenty-seven percent said the impact on their business would be negative because of the impact of increased prices on their customers or consumers in general. Another 27% said the likely impact on their company would be negative as a result of retaliatory tariffs on their export business, and only 5% said they would be negatively impacted because they would not be able to pass increased costs in their supply chain onto their customers.

Amato: On the hiring outlook, just within the last hour of this recording on Friday morning, March 7, we got the monthly jobs report for February, which overall had lower numbers than projected. But for the CPA executives in this survey, what is their outlook on hiring for the coming 12 months?

Witt: Well, following suit with the consistency of organizational optimism and expansion plans that we’re seeing in the survey, hiring plans also remain relatively constant. Overall, we have only 8% of companies with excess employees. About half of the say their head count is about right, and about 40% say they have too few employees. And of those with too few, 20% say they have plans to hire and 19% say they are hesitant to hire, which is up only a point from Q4.

Amato: What about those KPIs that you’re regularly asking about – revenue, profit, spending? What’s the projection on those for the next 12 months?

Witt: Those also reflect this slight ease in enthusiasm. Revenue increases are now being projected at 3% versus 3.3% last quarter when we had that nice jump in optimism and outlook. Profit projections also softened a bit, easing to a 1.7% expected increase over the course of the coming year after rebounding in the fourth quarter to a 2.2% expected rate of increase. Similarly, spending for IT, other capital, and training also gave back some of their gains that we saw with that big jump in the fourth quarter.

Amato: That’s a good, fast-moving rundown of the survey, as I think our listeners have become accustomed to. Ken, anything else you’d like to touch on to close out this episode?

Witt: I just think, as you said, the scene about the tariffs is a continually moving target, and we had some not such good news on consumer sentiment. Between the consumer sentiment and the impact of tariffs, I think we’ll have to wait and see what these decisions and other policy decisions will have on the economy going forward.

Amato: Great. The next Economic Outlook Survey is in the field with CPA decision-makers in May, and we will talk about those results in June. Ken Witt, thanks for being on the JofA podcast.

Witt: Thanks for having me.