Pockets of optimism — why there’s hope amidst ‘doom and gloom’

Sentiment about the economy, domestically and globally, is quite low in the quarterly Business & Industry Economic Outlook Survey. In fact, the last time there was this much pessimism among U.S. CPA decision-makers was 13 years ago, according to the data.

This podcast episode takes a closer look at that sentiment, explores specific challenges, points out some signs that finance executives are optimistic for the future, and delves into the effect of all this uncertainty on company forecasting practices.

Hear the analysis of longtime survey overseer Ken Witt, CPA, CGMA, associate director–Management Accounting Research and Development at AICPA & CIMA, together as the Association of International Certified Professional Accountants.

What you’ll learn from this episode:

• An overview of survey results from the fourth quarter.
• Finance decision-makers’ latest revenue and profit projections for the coming 12 months.
• The percentage of organizations with plans to hire staff.
• How forecasting has changed or stayed the same the past few years.
• Why Ken Witt calls for a “wait-and-see attitude” about the 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: Economic sentiment among U.S. finance decision-makers continued to decline in the most recent Business and Industry Economic Outlook Survey. In the eyes of CEOs, CFOs, and controllers, what are the top challenges, and where are there signs of optimism related to the economy? This episode of the Journal of Accountancy podcast takes a closer look at that topic. This is Neil Amato, and my interview with CPA Ken Witt, a colleague who’s been overseeing this survey for more than a decade, is coming up after this brief sponsor message.

Again, our guest today is Ken Witt. Ken, welcome back to the Journal of Accountancy podcast. We’re discussing fourth quarter Economic Outlook Survey results, which come from the responses of CPA decision-makers in business and industry. Ken, the high-level view is that pessimism, at least to me, has taken hold. There are inflation concerns. There’s talk of a coming recession, or already being in a recession. Would you say that’s an accurate summation of sentiment for this survey?

Ken Witt: Yes, it is a bit more bleak than we’ve had in the past quarters, but I think it still continues to be a mixed bag that we talked about in the third quarter. Optimism about the economy continues to decline. We’ve only got 12% optimistic about the U.S. economy, which is down from 18% last quarter. Global economy fell another two points with only 7% being optimistic about the global economy, which is consistent with what I’m seeing in the media, especially in Europe. Some U.S. pundits are still hoping for a soft landing here, but they’re saying that’s not likely for Europe.

On the negative side, as you pointed out, the pessimistic side, we ask one of our additional survey-within-the-survey questions about the potential for a recession, and 40% of our respondents said we were already in one. Another 43% said that we would be in one within six months, either by the end of the year or first quarter or first half of next year. So it is looking more pessimistic as you said. But in spite of that doom and gloom, while optimism about own-company prospects also declined further from 41% to only now 35% of our executives being optimistic about their own prospects, we have a good third of companies have a positive view.

Plans for expansion continue to hold relatively steady; now we only have 47% with plans to expand, but that only declined a couple of points from last quarter. That’s nearly half of our companies having plans to expand, and hiring plans also remain relatively strong. Slightly more than half say they need employees, and a majority of those say they plan to hire rather than wait and see. There’s this mixed story of gloom and doom about the economy but some continued strength with their own organizations and hiring plans.

Amato: We’re recording on Thursday, Dec. 1. The survey was open to respondents from late October to mid-November, and, again, it is a forward-looking survey. The finance executives are asked about projections for the next 12 months. So on the revenue and profit projections, and maybe also where they might plan to increase spending, what are you seeing on that front and maybe where are some signs of optimism in those?

Witt: Yeah, we ask about revenue and profit, we also talk about spending, just to get an idea and get a little bit more detail what’s going on with our executives businesses. This quarter, what we’re seeing is a little bit of tailing off of revenue projections from 2.6% to 2.1%, looking forward from the fourth quarter. The profitability was expected to be flat for the coming 12 months when we did the survey in the third quarter, and now we’re actually projecting a decline of two-tenths of a percent going forward from the fourth quarter. So I think our companies are getting squeezed in terms of the inflationary impact on the costs, squeezing out their profits a little bit. We’ll see how that goes going forward.

In terms of spending, that’s usually a pretty good barometer, and that was a little bit of a mixed bag as well. IT spending is always a big component, and that fluctuates a little bit, but it declined. We were seeing some strength in IT spending — 3.4% expected increase in IT spending last quarter, and that’s tailed off to 2.7% looking forward from the fourth quarter. Other capital [expenditures], on the other hand, increased from 1.9% projected increase to 2.1%. That’s showing a little strength in spending for capital items. Then we also check in with the training numbers, and that has been declining a little bit. As companies are getting their employees on board, they’re needing to spend a little bit less money in terms of training, although there’s still a need for employees and ongoing need for training new employees.

Amato: You mentioned that 47% of respondents expect some sort of business expansion in the coming 12 months. That seems like some optimism for nearly half the group.

Witt: Yeah, I think that’s why I say we’ve got a mixed bag of results. While there’s gloom and doom about the economy overall, especially the global economy, companies still are planning to expand their own business, and we can touch on the survey-within-the-survey questions about forecasting later, that we can talk about some of the challenges with forecasting consumer demand in particular, among other issues, but they also plan to hire.

Amato: That leads well into my next topic, which was hiring and talent. They’re tied together, and they are a common topic when we discuss these survey results. What’s the view right now around the challenges surrounding talent?

Witt: Looking at challenges, inflation continues to be the big bugaboo with 85% concerned about inflation, which is top of the chart of challenges now going back into the fourth quarter of 2021. But employee and benefit costs jumped a couple of slots into the No. 2 slot behind inflation, whereas materials, supplies, and equipment costs moved down three slots in the chart. I think what we’re seeing is availability of skilled personnel remained the No. 3 challenge, but turnover dropped a slot from five to six.

I think one of the things that we’re seeing is a little bit of settling out of the staff turnover as employees were moving jobs to get higher pay. There’s a little bit less turnover, but those costs are now embedded into the employee salaries and employment costs, as wages are embedded in their cost structures. One of the other challenges that we can get into a little bit is financing, which is either access or cost of capital, which is how we define it in the challenge list, made a reappearance in the top 10 list coming in at No. 7 this quarter is interest rate increases are also looming large.

Amato: You mentioned forecasting earlier. I guess that’s been a trend since the pandemic economy, so to speak, of either more rounds of forecasting, quicker turnarounds between forecasts, but also an increased complexity in that forecasting. What does that tell you about business these days, and where’s the forecasting trend heading?

Witt: You’re right, Neil. That’s exactly why we ask this question in our survey within the survey. We knew that in response to the pandemic, companies were just like trying to forecast almost on a daily basis as things were changing very rapidly back then, and that’s what we’re hearing from our members as just every bit of news was, “Oh my gosh, you know, we did that, that invalidated that assumption that we had in our forecast.” We were curious about, we’ve got all these geopolitical events going on right now. We’ve got the war in Ukraine, the impact on energy costs, and we’ve also got the Fed in the mode of bumping the Fed funds rate in response to inflation, trying to settle that down. We wondered if this confluence of events that we’re seeing right now is having a similar effect on the frequency and complexity of forecasting.

We asked about both frequency and the complexity. Interestingly, nearly a third of our respondents said they had continued their pace of more frequent forecasting. So, going forward, I think there’s just part and parcel of the role of the finance function and CFO and controller is that they’re going to be in a much more regular mode of frequent forecasting.

And, fortunately, technologies have emerged to facilitate that. Twenty-five percent said they had increased their pace of forecasting, and another third said they did not increase their pace of forecasting, while the third have continued that practice of frequent forecasting. As I said, I mentioned that we asked about the frequency of forecasting, and we also asked about the complexity of forecasting in relation to that pandemic period. We asked about how forecasting was more complex than a year ago.

Nearly two-thirds of our respondents said that forecasting is getting more complex, citing the pricing of goods and services and supply chain reliability along with labor shortages, and also as we mentioned before, the consumer demand is, especially when you’re thinking about going into a recession, what’s your real belief about that and how’s that going to translate into consumer demand for your business? So I think that reiterates the need for our business executives to really take a broad view about what’s going on with the economy and try to translate that into what that means for their business.

Amato: Ken, that’s a good summation of where things stand on a bunch of topics. Is there anything you’d like to add in closing?

Witt: As always, we need to take a wait-and-see attitude. I think in the media we’re hearing mixed views about the extent of a recession and the impact on the economy of all these factors. Hopefully, we don’t have any geopolitical events that are precipitous, and if that’s the case, maybe we can hope for a bit more of a soft landing than a deep recession.

Amato: Ken, thank you.

Witt: You’re welcome, Neil.