Small ‘signs of strength’ despite continued concern about inflation

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 second-quarter Business and Industry Economic Outlook Survey are less optimistic now compared with the first quarter.

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:

• Why Witt says the outlook this quarter is “mixed.”
• An overview of respondents’ sentiment about the domestic and global economies.
• The “signs of strength” in KPIs, including revenue and profit projections for the next 12 months.
• One metric that Witt will monitor in the third-quarter survey results.

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.

Neil Amato: Welcome back, podcast listeners. This is Neil Amato with the Journal of Accountancy. This is ENGAGE week, the biggest event of the AICPA & CIMA calendar, and over the next few episodes we’re talking to several speakers who are on-site at ENGAGE. The topic of this next segment is the Business and Industry Economic Outlook Survey, specifically the second-quarter results, which were released earlier today, Thursday, June 6.

Ken Witt, AICPA & CIMA associate director–Management Accounting Research and Development, is that survey’s guru. He’s a repeat guest, and he’s joining us on the show to discuss the survey. Ken, welcome back to the podcast.

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

Amato: Yeah, it’s a bit of a different mechanism for us, I guess. I don’t know that we’ve ever recorded this with one of us at ENGAGE, but you are at ENGAGE. I am back home in North Carolina, but I guess, this year, this survey falls on the same week as ENGAGE. Again, I said the results came out Thursday. That’s the day we publish this episode. First, what’s an overview of this quarter’s survey results?

Witt: Well, I think things are a little bit mixed this quarter. We continue to see some signs of strength, but we also are seeing some of the major concerns that our executives have about the economy continue. The optimism about the U.S. economy after rebounding to 43% in the first quarter, gave up 8 points to now only 35% of execs being optimistic about the economy.

On the global side, optimism about the global economy has been weak for some time now, but it’s ticked up a little bit and it ticked up another point of optimism to 22% this quarter. That’s on the global front. Fortunately, concern about the economy hasn’t really fully translated into concern about the organization. With organizational optimism, the optimism that executives have about their own prospects, eased only a point from 49% to 48%.

Along with that, expansion plans overall continued to show some strength, improving from 51% of our companies with plans to expand to 54% having plans to expand their business in the coming months. Expansion plans are more prevalent in the larger companies than in companies with revenues of less than $100 million. The smaller companies are maybe a little less eager to make investments and expand their business. Or they have done so already and are holding their pace now.

Amato: As you said, a mixed look, and optimism about the respondents own companies has historically always been a little bit higher than maybe how they’re viewing the domestic economy and certainly the global economy. But let’s get into some KPIs. What are the revenue projections? Again, for the coming 12 months in this survey. It’s a forward-looking survey. The revenue projections, and then also the profit projections, and how have they changed since last quarter?

Witt: I think that’s one of the signs of strength. Revenue projections ticked up another three-tenths from 2.6% projected increase to 2.9% projected increase, as you said, going forward 12 months from the second quarter. Similarly, profit projections improved another tenth to 1.5%, which is particularly encouraging after seeing profit projections in the negative territory in 2023. So, just sort of continued improvement on both of those fronts.

Amato: Let’s talk about hiring. That’s always a key aspect of this, beyond the KPIs is, what are the organizations doing with their workforces in the coming year? What do you see on that front?

Witt: I think they’re a little mixed, too. Fortunately, while we’ve seen some major layoffs on the part of big companies, especially in the early part of this year, we only have 2% of our companies with revenues in excess of $1 billion say they have excess employees, so they’re in good shape. This number is the same for companies at the other end of the spectrum, those with less than $10 million. They won’t be hopefully not having layoffs at the top or the bottom.

Overall, we have nearly a third of companies that need employees. This is down from 36% in the first quarter, and we have a downtick in plans to hire the companies that have too few employees with plans to hire down from 22% to 16%. We also have a slight uptick in those companies that are hesitant to hire. They need employees, but they’re hesitant based on circumstances, ticked up from 9% last quarter to 13% this quarter being hesitant to hire.

Amato: One of the aspects of the survey I’ve always liked to look at is the top challenges list over the years. For many years, regulatory requirements and changes was at the top of the list and then inflation. It’s still the No. 1 challenge. That’s not a surprise, but what else is on that top challenges list and how maybe has it changed over the year or over the last quarter?

Witt: The top three remain the same. This quarter as you said, inflation topped the list, and the need for skilled employees, along with employee benefit costs, maintain their place behind inflation at the top of the list. At the other end of the spectrum, turnover has continued its descent to the bottom of the list. Some of the other challenges — it seems a little mixed. Of course, domestic political leadership flipped places with domestic economic conditions in the four and five slots, which is probably not a big surprise in an election year.

But perhaps, more notably, while inflation continued to top the list, materials, supplies, and equipment costs fell three slots, from five to eight, and stagnant or declining markets returned to the top 10 this quarter. Like I said, some strengths, some weakness, and so we’ll see where the economy goes from here.

Amato: About inflation, about that R word recession, some people say we’re in one already. Some people don’t expect it to happen. Some say it will happen. What about that specific question, how do people feel about the onset of a recession?

Witt: Yes, we’ve been tracking this for a number of quarters now and just to see what people think what’s going on in their business. Inflation continues to be the top concern, ticking up another 4 points to 75% say they’re more concerned about inflation than deflation, but in terms of recession, we still have 15% that say we are already in one.

We have a slight uptick, from 19% to 20%, who say they expect a recession in 2024 and a slight downtick, from 48% to 45%, who say they did not expect a recession. Varying opinions on that, but moving, consistent with our overall outlook, a little more negative on the overall economy front.

Amato: Again, this survey was in the field for about three weeks in May. The next survey will come out after being in the field for about three weeks in August and will be released in early September. Ken, looking ahead, is there any particular metric or other sentiment area that you’re looking at for the third quarter?

Witt: I think we just need to continue to watch how inflation, whether it settles out and whether the Fed will be able to reduce interest rates. That’s I think what most people in the economy are looking for is when is that tickdown in interest rates going to occur?

We had a little better news on the employment front recently, and the inflation front seems to be settling out a little bit. But that’s just the beginnings of what we hope will be a continued trend towards a little less inflation in our economy.

Amato: Ken Witt, live from ENGAGE, thanks for joining us.

Witt: Thank you, Neil.