The reasons economic sentiment about the coming year is on the rise

Ken Witt, CPA, CGMA, AICPA & CIMA associate director–Management Accounting Research and Development, explains in this JofA podcast episode why finance decision-makers in the first-quarter Business & Industry Economic Outlook Survey are more optimistic now compared with the end of 2023.

Witt summarizes the survey results, including CPA decision-makers’ expectations for revenue and profit increases and the top challenges facing them and their businesses.

What you’ll learn from this episode:

• A breakdown of sentiment about the domestic economy and CPA decision-makers’ own organizations.
• Projected increases in revenue and profits for the coming 12 months.
• The top challenges facing finance executives.
• The hiring outlook for the coming year and how it differs by company size.

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: Welcome to the Journal of Accountancy podcast. This is Neil Amato with the JofA. Today on the show, we’re discussing first-quarter 2024 results of the Business and Industry Economic Outlook Survey. Ken Witt is our local survey guru. Ken is a CPA who holds the CGMA designation. He is AICPA & CIMA’s associate director for Management Accounting Research and Development. Ken, first, welcome back to the podcast. We’re glad to have you on.

Ken Witt: Thanks, Neil. Always good to be here.

Amato: First, the survey results do indicate a rise in optimism. It’s not an outlook that’s overall considered optimistic. There’s a difference. But I guess it is an improvement over recent quarterly surveys in terms of domestic outlook and also own-company sentiment.

Witt: Yeah, I’d say what we’re seeing is a little bit more settling in that we saw in the fourth quarter, after some really ups and downs throughout the course of last year. The optimism about the economy, in particular, rebounded, up to 43% from 24% in Q4 2023. That’s a pretty significant improvement overall. As you know, our organization optimism never has quite the swings that our members feel about the overall economy, but that also ticked up another six points to 49% of our members are now optimistic about their own prospects, up from 43% last quarter. That’s an improvement.

Expansion plans also ticked up 5%, with now 53% of all respondents saying their companies have plans to expand. There’s just overall improvement. Not through the roof, but steady progress.

Amato: When you hear those specific numbers — nearly half now optimistic about their own-company sentiment, 49%; more than half, 53%, expect their businesses to expand — does it surprise you, given where things were one, two quarters ago?

Witt: No, I think we’re consistently seeing a bit of a mixed bag of things. Some strength here, some strength there. Revenue and profit projections really dropped significantly mid-year last year, and those are both up. We’ve got companies projecting revenues increase of 2.8%, after dropping down to 1.8% in Q4. But profitability projections, we were in negative territory in 2023. and now they’re projecting 1.4% profit over the course of the next year, and that’s up almost a point from what we saw in the fourth quarter.

There’s been some ups and downs. My sense of this is that we’re just overall moving in the right direction, but not a rapid pace because there are still some concerns out there.

Amato: One of those concerns is inflation. Where did the survey respondents stand on inflation as a challenge to their businesses?

Witt: Once again, we’ve got our top-10 challenge list, and inflation tops the list this quarter as it has for most of the quarters for the past year, two years — so, a big deal. I think we’ve had 72% of our members saying they’re more concerned about inflation than deflation.

Amato: Also, on the minds of the finance executives is the possibility of a recession. It’s a question we’ve asked a lot lately. I’m not sure it’s been every quarter, but we do sprinkle it in more than once. Can you summarize the respondents’ sentiment on the likelihood of a recession in the next year, and especially, how that sentiment maybe has changed over the past few quarters or last year?

Witt: Yeah, I think that’s within-the-survey questions that we’ve been asking pretty consistently for several quarters now, and while we still have 15% that [say] we are already in [a recession], and I’m not sure whether that’s people who are insistent that we stick to a technical definition of a recession or whether that’s just the impression that they get from their own business. But 19% say they expect the onset of a recession in 2024, which is a significant drop from what we were seeing a year ago.

But we now have 48% say that they do not expect a recession, and those numbers are a flip from the fourth quarter, when 40% said they expected a recession in 2024, and only 27% thought we would escape the recession scenario altogether, and that’s just a quarter ago. So I think we’re seeing some more optimism on that front that we will have that soft landing that we’re hoping for.

Amato: Yeah, and I believe recent comments from the Fed, from Jerome Powell, have said there’s nothing that indicates right now that the U.S. is in a recession currently.

Let’s talk about hiring. What’s the outlook for the coming 12 months?

Witt: Well, I think we look at hiring from a number of different angles because that’s such a big deal for the economy and I think something that our members in particular have the pulse on. As we’re seeing in the jobs report that just came out [March 8], there was a surprising, significant increase in jobs, 275,000 jobs added in February. That’s another month back-to-back where they had pretty significant jobs added, and unemployment increased to 3.9%, up from 3.7%.

We try to look at it from different angles. As I said. we’ve got inflation, at the No. 1 slot on our top-10 challenge list, but employee and benefit costs are still a challenge, coming in at the No. 2 slot right behind inflation. And directly followed behind the employee and benefit costs is the availability of skilled personnel. People really still having trouble finding the right employees for the right jobs.

Maybe reflecting the news — we’ve had some in the news about the big companies having layoffs — staff turnover has dropped down to the No. 9 spot. Based on that news that we’ve been seeing about layoffs, we tried to get at that a little differently with the survey-within-the-survey question about the economy impacting hiring plans.

We asked that question first and second quarter last year, and while there is some impact being reported this quarter, we had 72% of our respondents say the economy has not affected their hiring plans. That’s up from 71% first quarter 2023 and only 63% in second quarter 2023. That was our gloom-and-doom quarter last year, and so we had a fair number of companies that were really taking some action to make sure they had their jobs in line with their expected business prospects different.

Amato: Let’s go back for a second to expansion plans. There are different sizes of companies in this survey. It’s not a ton of really large ones, but how are, say, the expansion expectations for a company with more than $1 billion in annual revenue different from those on the smaller end, maybe $10 million to $100 million?

Witt: Sure. That’s one of the things we keep track of. We track expansion plans and hiring plans by company size, just because I think there’s a different impact on the economy depending on who’s doing what.

This is an interesting quarter because the big companies, in spite of the fact that they’re the ones that are announcing some of the big layoffs and we’re seeing our smaller companies that are holding their own. In terms of hiring plans, 38% of large companies have too few employees. Only 17% of those remain hesitant to hire, while 21% are planning to hire. We’ve got exactly the opposite happening with the smaller companies with revenues less than $10 million. The same number, 38% have too few employees, but 21% of those companies are hesitant to hire and 17% have plans to hire.

I think the smaller companies have had a pretty good run, but I think they’re holding back now. It looks as though they’re holding back a little bit now. We’re seeing the same thing in terms of expansion. For large companies where the revenue is greater than $1 billion, their expansion plans increased 21 points from 46% having plans to expand to now 67% of big companies have plans to expand.

On the smaller company front, that number fell 20 points. Last quarter, we had 51% of the companies with revenues less than $10 million said they had plans to expand, and now only 31% say they have plans to expand. We’ll see what impact that has on the economy. I think as the big companies go, oftentimes the small companies follow as a lot of them are suppliers to big companies. And so the big companies, they have a lot more pull in the economy than, I’d say, the small companies. They have a significant amount of push, though.

Amato: Ken, thank you for that summary. Anything you’d like to add in closing?

Witt: No. I think hopefully we’ll continue to see some progress and get out of this period where we’re really going to be plagued by concerns about inflation and move forward in the right direction our next quarter.