Summing up economic sentiment: Less revenue, more pessimism

CPA decision-makers in business and industry weren’t optimistic at the end of last year, but their outlook grew a bit sunnier as 2023 began. Now, as 2023’s midpoint approaches, the outlook of finance executives is again taking on a more pessimistic tone in a quarterly survey. Contraction plans are more common, and projections for revenue and profit have declined.

Ken Witt, CPA, CGMA, AICPA & CIMA’s associate director–Management Accounting Research and Development, discusses the results of the Economic Outlook Survey in this podcast episode.

What you’ll learn from this episode:

• An overview of second-quarter survey results.
• Why Witt now says that the fourth quarter of 2022 may not represent “the bottom” in terms of sentiment.
• How the high-interest-rate environment is affecting companies.
• Examples of more stringent lending requirements that businesses are facing.
• The hiring outlook and projections for the coming 12 months for revenue and profit.

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: Each quarter, generally in the first few days of March, June, September, and December, the AICPA & CIMA publish results of the Economic Outlook Survey, which is a look at sentiment of U.S. members working in business and industry.

That survey is the focus of this episode of the Journal of Accountancy podcast. I’m Neil Amato with the JofA, and joining me for this episode is Ken Witt, AICPA & CIMA’s associate director for Management Accounting Research and Development. Ken’s a CPA who holds the CGMA designation, and he’s seen the ups and downs of this survey for close to 20 years now. Here’s that interview.

Welcome back to the Journal of Accountancy podcast. This is your host, Neil Amato. I’m joined, as I said in the introduction, by Ken Witt, my colleague. Ken, again, we’re going to talk about the quarterly Economic Outlook Survey today.

First, I guess, let’s set the stage and explain for people who might not know, what exactly is this survey? Who are the respondents? How long has it been conducted, and why do you think it, I guess, is a good gauge of the sentiment of our members?

Ken Witt: Sure, Neil. We’ve been doing the survey, I guess we’re coming up almost on 20 years. For 20 years next year, I think. We started off as a semi-annual survey and then moved into the quarterly version of it that we’ve been doing for a long time now.

We survey our members, our C-suite members, CFOs, controllers, other executives, and leaders in our membership. Basically, we try to get their sentiment about what’s going on in their organization. We do ask about their opinion about the economy in general and about the global economy.

But I think the real meat is, we ask them what’s going on in their business. What are they planning on spending? What are their forecasts? Rather than asking accountants to give their projections about the economy, we ask the accountants to get their projections about their business.

Amato: That’s a good point and a good clarification. Thank you for that intro. We’ll get into it. What is the overview to you of the second-quarter results, which were obtained from responses in three weeks in May?

Witt: We launched it the first week in May, and closed it last Wednesday. That was one of the caveats that I was going to include was that while there has been a lot of headlines about the debt ceiling and the political back and forth around that, the sentiment this quarter reflects that. While that’s always been an overhang for quite some time now, our results are really not a reaction to what’s been going on in the past week, but what’s going on more generally, I would say.

Contrary to what I said, last quarter I said it appears as though we hit a bottom in the fourth quarter of 2022. Maybe not so much, because we’ve seen another significant drop in sentiment this quarter.

Amato: That sentiment this quarter more closely resembles the fourth quarter of 2022 as opposed to the first quarter of 2023. Why were CPA decision-makers suddenly less optimistic than at the start of this year you think?

Witt: Well, I think reality has started to set in a little bit. We’ve had some mixed results over the past several quarters. It’s just been a lot of concern about inflation and the Fed’s tightening. I think maybe one of the things we’re seeing, I was wondering that same thing, and I went back and took a look. I think there was some good news in January. The Fed rate hike was only a quarter of a point where the previous ones have been half a point.

There was also some good news about energy costs and hiring, and wages seemed to be tampering down a little bit. I think there was a little bit of cause for optimism that things were maybe getting a little bit back in line with maybe a little more normal than usual and a little less concern about what was going to happen.

But now I think the tightening has started. Hiring is easing a little bit. There are some positive points, but I think maybe that first quarter, I think we always start the first quarter of the year a little bit optimistic anyway, but now we’re moving into the second quarter, and people are looking forward and getting a little bit more visibility in what their coming year will look like.

Amato: Let’s talk some about specifically the revenue and profit projections for the coming 12 months. They are lower than the previous quarter, and also, in the case of profit, I guess in negative territory.

Witt: Yeah, I think that’s a pretty strong indicator. The revenue projections fell from a rate of increase projected going forward from the first quarter of 2.6% down to now only projecting 1.3%, and profit projections, like you said, fell back into a negative territory. We were negative in the fourth quarter of ’22, and we’re back in the negative 0.9% negative after rebounding to a positive 0.6% in the first quarter.

I think those sentiments reflect what we’re thinking about the economy overall. Optimism about the economy fell back from 23% in Q1 to only 14% in Q2. I think the other thing that I noticed about this quarter’s results was that pessimism and contraction plans both jumped. Pessimism jumped from 44% to 56% when we’re talking about the U.S. economy.

I always think the optimism about our respondents’ own organization is really the key here. That dropped from 47 to 35%, but pessimism there increased from 19 to 28%. And expansion plans eased off. We still have 43% of our businesses saying they’re going to expand, but those with plans to contract jumped from only 20% last quarter to 31% looking ahead from this quarter.

I look back at that number, too, and that’s a higher number than at any other time other than 2020 when we shut down from the pandemic and we had a lot of businesses contracting then. But even going back before 2020, the contraction plans were in the teens and some in the 20s, but 31% is a recent high.

Amato: It is pretty rare in this survey, at least in the 10 years or so, 10 or 11 years that I’ve been paying attention to it, that the optimism numbers not only are lower than the pessimism numbers but are actually in the teens. I don’t know that there’s truly a way to address this, but what does it say to you when optimism is below even 20% for the U.S.?

Well, as I said, that’s the number that I look at as the organization optimism because I think the U.S. economy optimism is much more a reflection of the media and the headlines as it is anything. We haven’t seen a lot of good news in the headlines lately about the economy, but I think that’s encouraging that we still have already heard about businesses optimistic about their own prospects. Not good but not terrible. Not as grim as the opinion about the overall economy.

Amato: We’ve talked about revenue and profit projections. What about other spending projections for the coming 12 months?

Witt: Actually, I think that might be a bit of a bright spot in all of this. We track IT spending. We track other capital spending. We track training spending, and we ask what their projection for increase is, assuming that businesses will increase their spending in all of those areas at some rate, and basically they were all the same from the first quarter. That’s maybe a little bit of optimism that people aren’t drastically cutting back their spending plans, but they’re continuing forward with those plans.

Amato: What about hiring? You touched on it a little bit in a previous answer, but what’s the hiring outlook for the next year?

Witt: I think [hiring numbers] are still strong, I think people still need employees, and this may be a good indicator going forward, that hiring is not deteriorating. We have about 43% who say they have too few employees. That’s just only down a point from last quarter. So the balance still need employees, but those planning to hire dropped 7 points from 33 to 26%. But those hesitant to hire increased 11% to 17%. You get the same number of companies saying they need employees, but some are hesitant based on what they’re seeing in the economy, so they’re maybe holding off a little bit.

Amato: Anything else from the survey results you’d like to highlight including, I guess, maybe it’s the obvious top challenge — inflation?

Witt: Well, as I said, inflation is the top challenge. But given the high-interest-rate environment, we’re really curious about what companies are doing in that high-interest-rate environment and what’s going on with the results of Fed tightening and the impact on financing plans. So on the list of challenges that we ask about, availability and cost of capital has been in the top 10 and maintained its ninth-ranked slot.

But liquidity also made its first appearance on the list at number 10. So that’s a new appearance for liquidity. We also use our survey within the survey to drill down on some of this, and one of the things we asked was seeing if companies are taking actions, and many are taking actions to respond to this, like managing their working capital more aggressively and deferring capital investments.

A few of our members are also telling us that their lenders are imposing more stringent requirements on them, like increasing collateral and approving their loans for less than requested amounts. That’s one of the things that’s going on. We were curious also about Silicon Valley Bank, what the impact of that might have been on requirements for lending.

We had a few say that they were impacted by more stringent requirements, and nearly half of this group said that they were already being subject to more stringent hiring requirements just because of the tightness in the economy.

But we also had another 30% of this smaller group say that they were experiencing these more stringent lending requirements in response to Silicon Valley Bank. We will wait and see what happens over time, if this settles out or whether we see continued tightening on a broader scale since that was a pretty recent phenomenon with respect to this survey.

Amato: Do you think the tighter lending environment is one of the reasons that the expansion plans maybe are more on hold?

Witt: That might be. I think this is one of those things we’ll wait and see what happens in the next quarter, because I think that the response to that is still evolving. We’ll see the extent to which banks are imposing more requirements on their lenders and whether it’s just interest rates or these other requirements. My guess would be that there will be more stringent requirements.

What impact that has on expansion plans. I would think the outlook for their business probably contribute more to a company’s plans to expand than the negative side of availability of credit, but we’ll wait and see.

Amato: So, Ken, as June begins, I guess we will look ahead and wait and see and talk again with the results in September. Thanks very much.

Witt: Yep, look forward to it.