What replaced inflation as the top challenge for finance leaders

Ken Witt, CPA, CGMA, AICPA & CIMA associate director – Management Accounting Research and Development, discusses in this JofA podcast episode the reasons that finance executives in a quarterly AICPA & CIMA survey continue to lower their optimism about the U.S. economy.

He also reveals what CPA decision-makers now view as their organization’s top challenge. For the first time in a long time, it’s not inflation.

On the episode that detailed the previous quarter’s survey, Witt noted that inflation “seems to be settling out a little bit.” This quarter’s survey data shows that was an accurate assessment, as inflation concerns are diminishing somewhat.

What you’ll learn from this episode:

• Details about Witt’s assessment of this quarter’s results as “interesting.”
• The surprising parts of the third-quarter data.
• Updated projections for revenue and profits in the coming 12 months.
• How election-year uncertainty is affecting CPA decision-makers’ business forecasting efforts.
• The percentage of finance executives who say that a potential lowering of the federal funds rate would have a favorable impact on their business.

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 back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. It is early September, and in our world, that means it’s time to look at third-quarter results from the Business and Industry Economic Outlook Survey. There’s a surprise in this quarter’s results, and you could say there’s more than one surprise. We’ll talk more about those details after this brief sponsor message.

Amato: Welcome back to the show. As I said, we’re discussing the third-quarter Business and Industry Economic Outlook Survey results with Ken Witt, AICPA & CIMA associate director – Management Accounting Research and Development. Ken, take us through, first, an overview of this quarter’s results. And, oh by the way, welcome back to the podcast.

Ken Witt: Thanks, Neil. Always good to be with you. As you said, there were a few surprises in this quarter’s results. They are quite interesting, I think. While we’re seeing some easing and concern about inflation by our members and the prospect of interest rate reductions on the upside, optimism and expansion plans are down a bit.

Optimism about the U.S. economy gave up another nine points from 35% in the second quarter to only 26% this quarter, and optimism about the global economy also gave up three points from 22% to 19%. And while we usually see less of a decline in organizational optimism – in the last quarter, the decline in U.S. optimism didn’t translate directly into organizational optimism.

What we’re seeing this quarter is organizational optimism fell seven points from 48% to 41% continuing to be optimistic about their prospects, and expansion plans also gave up 10 points, falling from 54% last quarter to only 44% this quarter saying that their business has plans for expansion.

Amato: Again, 41% of respondents are expressing optimism about their own organizations for the coming 12 months. That’s down from 48% the previous quarter. Tell me about some of those KPIs we look at, revenue and profit projections. It seems like those are down a good bit this quarter.

Witt: Yeah, you’re right about that. KPIs followed suit with the decline in organizational optimism and expansion plans. Our revenue projections dropped nearly a point and a half from a 2.9% projected increase in revenues for the coming 12 months last quarter to only a 1.5% rate of increase this quarter. Similarly, profit projections gave up their gains we had seen, falling from only 1.5% to only 0.2% rate of increase looking ahead from Q3.

Amato: What about hiring? What has all this change, I guess a little bit in optimism, done to the hiring outlook?

Witt: Fortunately, that’s one of the areas where we’re seeing some consistency between this quarter and what we saw last quarter. We still have nearly a third, 29%, of companies [say they] need employees, but in terms of their plans, we’re seeing a slight uptick in those companies who are hesitant to hire from 13% to 15%, and a corresponding downtick in those with current plans to hire from 16% to 14%, so, just marginal difference in sentiment in terms of hiring and reluctance to go out and get those employees that they need.

But the employment situation continues to be a challenge. Employee and benefit costs displaced inflation on our top 10 list of challenges – that was the top-ranked challenge. And availability of skilled personnel along with turnover continued to be in the top 10.

Amato: I can’t believe how subtle you were in dropping that news that inflation is no longer the top challenge. It just seems like we’ve been talking about inflation for a long time. It clearly hasn’t gone away, but what’s the latest on inflation in terms of specific sentiment as it falls to No. 2 on the list of top challenges?

Witt: Well, in addition to having it be one of the top 10 challenge options that we asked people to tick off, for some time [we have been] asking you a question about whether executives are more concerned about inflation or deflation because that has come up on the screen in past years, and we also give them the option of saying they’re concerned about neither.

But after peaking at 93% in the second quarter of 2022 with those more concerned about inflation than deflation and ticking up to 75% last quarter, the percentage of executives concerned about inflation declined to 57% this quarter. That’s consistent with what we’re hearing in the news. Inflation has ticked down a little bit.

Amato: It’s going down, but it’s not gone away, I guess, is the best way to put it.

Each quarter in the survey, there are questions that are specific to that quarter. In this particular survey, I guess, there were questions about interest rates and also potential impact of the election. Let’s talk about interest rates first. What specifically was the topic, and what is the respondents’ sentiment about interest rates?

Witt: The question that we asked about interest rates – we asked about the potential impact of expected interest rate reductions on their business. Because that’s been front and center in the news, and 69% of our respondents said that expected interest rate reductions would either be moderately or very favorable to their business, 21% said that it would have a neutral impact on their business, and 10% said it would be either moderately or very unfavorable.

We got some businesses on both sides of the equation when it comes to interest rates and the impact of interest rates on business. We asked about the primary areas of impact of a reduction in interest rates, and cost reductions and increased profitability, along with possibilities related to financing business expansion or hiring were the primary positive impacts. And on the downside, businesses also indicated the negative impact of reduced investment income and decreased profitability. We have businesses on both sides of the equation, as I mentioned, but 69% said that there would be either very or moderately favorable impact on their business.

Amato: Again, that’s in reference to the Fed funds rate potentially being reduced. There definitely have been hints that that could come later in September. They’re not here yet, but with nearly 70% saying that would be favorable and 21% saying neutral, it does look like a potentially positive development for most respondents in the survey.

About an election year, a presidential election, we get this every four years, and the respondents were asked how election year uncertainty, I guess, affects their coming-year business planning efforts. What are the respondents saying about election uncertainty on that front?

Witt: I think this timing is important because this is the time of year when businesses are planning and forecasting for future years. We did ask what’s been the impact on their forecasting, and we only had 16% that the election year uncertainty had no impact on their business. We had another 12% say it was significantly impacting their business planning and forecasting, 38% had a limited impact, and 34% said it was having a moderate impact.

We also asked the follow-on question, and we asked them to tick all that apply, but 70% of our respondents say that uncertainty was impacting their revenue projections. Another third said it was impacting their staffing compensation and training plans, 30% said it was impacting other investment spending projections, and 17% technology and digital investments.

We’ve got nearly 84% say their business’s forecasting is being impacted by election-year uncertainty, and it’s across the board in terms of what areas of business it’s impacting.

Amato: The next survey will be in the field, at least on schedule I guess, right after the election. There will be a lot more that becomes known in that next quarter, I guess, but anything else you’d like to say, Ken, looking ahead or looking back on this quarter’s results?

Witt: No, I think this one is a little bit of shift. I think that there’s some positive things in terms of the interest rates. We’ve been saddled by high interest rates for a long time, and inflation has been just really causing a lot of pain for our businesses and for our consumers. I think by the time we do get into the field for next quarter’s survey, we will have some resolution on both those fronts and what the impact will be on the economy, and we’ll see what that looks like when it’s reflected in our members’ responses.

Amato: Ken Witt, thank you very much.

Witt: Thank you, Neil.