Why U.S. business confidence is dropping

Each quarter, the AICPA surveys U.S. finance decision-makers — CEOs, CFOs, and controllers — about their outlook on the economy for the coming 12 months. Ken Witt, CPA, CGMA, the Association’s senior manager for management accounting, provides insight into finance executives’ hiring plans for the next year, the challenges that are drawing more attention, and how companies are dealing with a shortage of skilled personnel.

What you’ll learn from this episode:

• The reasons finance executives are taking a less optimistic view of the U.S. economy.
• Why regulatory requirements, long a top challenge in this survey, are seen as less of a burden today.
• A breakdown of hiring plans by company size.

Play the episode below:

To comment on this podcast or to suggest an idea for another podcast, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Ken, thank you for being here.

Ken Witt: Thanks, Neil. Always good to be here to talk about the Economic Outlook Survey.

Amato: You’ve been paying close attention to the data in this survey, which is quarterly and provides a forward-looking view into the thinking of finance decision-makers. Some of that view includes the challenges they face. Suddenly, domestic economy is now high on the list. Domestic political leadership has also jumped up near the top. Why is that?

Witt: Yeah, looking back over the past couple of years, while there were a couple of blips with respect to domestic political leadership, for the most part what we have seen is optimism about the economy and favorable comments about political leadership, especially in response to the [Tax Cuts and Jobs Act]. Over the past few quarters, we have begun to see increasing concerns about the length of the current recovery. And while, for the most part, many of the overall indications continue to be showing strength, when we ask the open-ended question about what is influencing their view about the economy, tariffs and trade concerns were very frequently cited, along with the continued political unrest.

Amato: So, also on the list of challenges, something that stood out to me is regulatory requirements. I’ve been following this survey since about 2012, and it seemed that regulatory requirements were always, if not first, very high [on the list of challenges]. Now, down to sixth on the list. Can you recall a time that it’s been that low?

Witt: No. You’re right. For the longest time, regulatory requirements topped the list of challenges on an ongoing basis. In the past few years, we’ve seen a few dips, but this [quarter] is the first time that’s dropped to the sixth-place ranking. While I do think regulatory requirements and compliance is an ongoing concern and problem for companies, going back to the open-ended question we ask our readers about what’s influencing their opinion, we have seen over the past several quarters comments about regulatory relief being a positive influence. So, I think that may have some bearing on the decline on the list of challenges.

Amato: So we’ve talked about [challenges 2, 3, and 6]. Now let’s actually talk about the top challenge for a while now, availability of skilled personnel. What are companies doing about that? They keep saying it’s a challenge, so obviously they’re taking steps to address it. Are they spending more on training, or what are they doing to combat that challenge?

Witt: Here again, while I think availability of skilled personnel continues to be at the top of the list and an ongoing problem for companies, it’s also reflected in the current low unemployment rates, it’s a problem companies have been addressing for several years now. The actual rate that companies plan to increase their workforces by eased a couple of tenths in this quarter from the second quarter. And also the rate of spending for training and development also eased a couple of tenths. While companies plan to increase their hiring and increase their spending on training, they’re going to do so over the next 12 months, they’re going to do so at a slightly lower rate than they projected last quarter. In the second quarter, we did drill down into some of the solutions that companies are trying to deploy against this challenge of getting the right workers. The vast majority said they planned to increase salaries and wages in response to the tight labor market. We’re also seeing a little bit of easing in the rate of increase in salary and benefits this quarter. So, there’s a little benefit to this that we’re starting to see. But aside from that, companies have adopted a wide range of both compensation-related tactics and culture-related tactics to deal with the challenge. So I think it’s sort of things that have begun to embed themselves into organizations over the past few years as they’ve struggled with this challenge.

Amato: On the topic of hiring plans, one thing I noticed is a year ago, 32% of respondents said their companies planned to hire because they had too few employees. Now that’s down to 25%. What does that say to you?

Witt: I think a couple of things. For the most part, it reflects what I was just talking about. Companies have been trying to address the problem for the past few years, and maybe they’re catching up with themselves a little bit. But I think there’s also a possibility of a bit of easing about their expectations for the continued strength of the economy going forward. While we only have 25% with too few employees that say they are planning to hire, we also have only 13% that say they are hesitating to hire, which is the lowest percentage we’ve seen this year. When looking at this on an overall basis, this is the first quarter in the past two years that we have had less than 40% of our companies say they have too few employees. And taking a look at the breakdown by company size, only 21% of companies with revenues in excess of $1 billion are planning to hire, and 18% of these say they are reluctant to hire. I always kind of take a look at this breakdown. When the small companies are hiring, you know the economy’s good. But the big companies, I view them as a bit more of a bellwether of what to expect and look for going forward.

Amato: You mentioned it some earlier in our conversation, but in general, is the outlook still positive? We’re talking about so many of these declines, but where do things stand overall?

Witt: I think right now the outlook is still positive. We’re still seeing a lot of the traditional signs of strength: low unemployment, continued growth, low interest rates, continued stock market strength, and we’re also seeing continued optimism in the retail sector and construction. On the other hand, manufacturing optimism has started to taper off, along with hiring in that sector. So, on the downside, we may be starting to see some of the impact of the policies that our members cited as concerns that I noted before, especially the tariff and trade issues. What I also think might be worth noting is that the University of Michigan Consumer Sentiment Index posted its largest monthly decline in August since December 2012 when we had the fiscal cliff issues that were the big news. This time, consistent with the concerns that our members voiced in the survey, 1 in 3 in the Michigan survey cited tariffs as a concern. So, I think if you take note of the period in which our survey was open — it closed on [Aug. 21]. That was before the G-7 summit and all the ongoing talk about further increasing tariffs. So we’ll see what comes of that, and what the impact will be of those issues going forward.

Amato: Right, and that next going-forward time will be around the first week of December, when we’ll get the sentiment from the November survey period.

Witt: Yes, exactly. We’ll survey in November and publish our results the first [week of] December.

Amato: OK, Ken, thank you so much.