Sep 16th 2011
By Anne Rosivach
Panelists in a recent American Institute of Certified Public Accountants (AICPA) Webcast, Economic Outlook Survey Q3: the Slow Recovery or Double Dip Recession?, were invited to take a close look at the pessimistic conclusions of the CPA Outlook Index (CPAOI) for the third quarter, and consider what it could mean for CPAs and their clients. "For the second consecutive quarter, the CPA Outlook Index declined as turbulence in the political and economic environment eroded the sense earlier this year that a recovery was taking hold," said Carol Scott, the AICPA's vice president for business, industry, and government.
CPAOI is a quarterly survey of business and industry members of the AICPA – primarily CFOs, CEOs, and controllers. Two thirds of the CPAs surveyed work in private companies; two thirds of the companies report revenues of less than $100 million.
The Index declined 8 points to 58 in the third quarter, down from 66 in the prior period. A 61 percent majority of respondents said they think it is "somewhat likely" or "very likely" the U.S. will fall into a "double-dip" recession, even though 53 percent of companies still expect their businesses to expand over the next year, with 60 percent of the largest companies looking to expand.
Executives responding to the survey forecast weak growth in the GDP, in the range of 1 – 2 percent. Revenue is expected to grow by 2.4 percent, with profit by 1.7 percent.
Pessimism about economic growth was highest among executives in the construction industry and health care providers who expect to see revenue declines with from cuts in government spending for health care. The outlook for technology companies was generally positive, both in terms of revenue and hiring. Panelists questioned some of the index's conclusions about the decline in retail.
Meeting the greatest challenges
The greatest challenges executives expect in the next two quarters are collections/nonperforming accounts (36-39 percent) and supplier pricing terms and performance (25 percent). "CFOs must do what they have always done," said Chris Rogers, CPA and chief financial officer at Infragistics, Inc. a technology company, "which is mind their knitting. Look out for those receivables."
The majority of companies reported that they had enough cash on hand for their needs. Rogers said that he had just opened a line of credit without difficulty, but some small companies continue to have difficulty borrowing. Many small companies are using cash insight analysis, a very detailed study of their cash risk, Gary Lubin, CPA and chief executive officer at Centerphase Solutions, told the panel.
Hiring and inflation
Respondents showed little concern about inflation in terms of labor costs but some concern about the cost of raw materials. Speakers agreed that companies could not pass increased costs on to consumers. Companies will spend 2 percent on IT, because it leads to greater productivity, panelists said, but only.5 percent on training.
Ten percent of the companies expect to hire in the coming year. Thirty-two percent said that they did not see a return to pre-recession employment levels in the foreseeable future, which prompted speakers to talk about a possible "new normal" of 7 percent unemployment.
No one will be hiring in anticipation of new business, panelists said. "The contract has to be signed." One fifth of companies need more workers but are afraid to hire. Many companies are hiring contract workers to meet their needs, the speakers said, and are likely to continue to do so to avoid benefits costs.
Rogers said that it was hard to find qualified workers in the technology sector where many companies plan to hire. He said that he might be forced to hire outside of the U.S. but planned to bring the workers here.
Mother Nature and European turmoil
David H. Resler managing director and chief economist at Nomura Securities International, Inc., blamed specific events for some of the economic decline. Mother Nature had a role in slower growth – the long disruptions caused by storms, and the earthquake in Japan. Along with other speakers, Resler said that business leaders were probably nervous about the volatility in the stock market. "There is huge uncertainty about European debt," he said, "and the possible exposure of U.S. banks to defaults in Europe."
In general, the panelists forecast slow growth, not a recession, and referred to Index data that would confirm this. "The economy is stalled," Scott said. Resler described the economy as in a "maintenance mode."
Scott also said that the overall pessimism about the economy expressed by the 1,305 respondents may have been a reaction to the rancorous debt ceiling debate which was going on while the survey was conducted.
Executive underscored their concern about events in Washington by making "Political and economic instability" the second most worrisome trend, up from fourth and replacing health care. Customer demand remained the most worrisome trend for the fifth consecutive quarter; regulatory requirements remained in third place.
The future – will Washington change and best ideas
Stan Collender, partner at Qorvis Communications, disagreed with the survey's conclusions about political instability. "Washington is toxic," he said. "Business can be very certain that there will be no changes in monetary or fiscal policy for the next two years. . . . Congress will not agree to anything the Super Committee comes up with, and whatever is in the mandatory deal will change many times before January 2013, when it is scheduled to come into effect."
"Individual members of Congress represent their constituents very well," he added. "Over 70 percent want cuts in spending but the only cuts the American people can agree on are to foreign aid."
Rogers reaffirmed that CFOs must mind their knitting and understand their risks. He said that health care costs would again be second to customer demand as a worrisome trend.
Scott suggested that CFOs could use some of the cash on hand for training their employees, as the Japanese companies operating in the U.S. did during the disruption in their operations caused by the earthquake.