Economic Optimism among CPAs Continues to Decline

By Anne Rosivach

 
CPA decision makers, primarily CEOs, CFOs, and controllers, are becoming more pessimistic about the future of the US economy, according to the latest American Institute of CPAs (AICPA) Business and Industry Economic Outlook Survey. The overall results of the fourth quarter survey, conducted between November 8-29, 2012, showed the CPA Outlook Index (CPAOI) dropped from 63 to 59, marking the third consecutive quarter of decline. 
 
The generally gloomy outlook among CPA is strengthening: 
  • The percentage of respondents who identify as pessimists increased sharply in the fourth quarter from 40 percent to 49 percent.
  • The percentage of respondents identifying as neutral declined, a significant shift from previous quarters. 
  • The number of respondents indicating they were optimistic or very optimistic remained flat at 21 percent. 
The CPAOI is a broad-based composite index of the expectations of AICPA members and their plans, measured in nine indicators of economic activity (see sidebar). The index is set on a scale from 0 to 100, with 50 considered neutral and greater numbers signifying positive sentiment.
 
All components of the index dropped this quarter. Outlook for revenue, profit, and staff growth declined for the third consecutive quarter. Only half of respondents expect their organizations to expand in the next 12 months, down from 56 percent last quarter and 59 percent in fourth quarter of 2011. 
 
"While most executives are still projecting modest growth for their businesses, the trends for hiring plans suggest retrenchment rather than recovery," said Arleen R. Thomas, CPA, CGMA, the AICPA's senior vice president of Management Accounting & Global Markets. "Only 8 percent of firms have immediate plans to hire, and the number of businesses that say they have too many workers is on an upswing." 
 

CPAOI Indicators

The CPAOI is the composite of the following nine indicators at equal weights:

  • US Economy Optimism - Respondent optimism about the US economy.
  • Organization Optimism - Respondent optimism about prospects for their own organization.
  • Expansion Plans - Respondent expectations of whether their business will expand over the next 12 months.
  • Revenue - Expectations for increases or decreases in revenue over the next 12 months.
  • Profits - Expectations for increases or decreases in profits over the next 12 months.
  • Employment - Expectations for increases or decreases in headcount over the next 12 months.
  • IT Spending - Plans for IT spending over the next 12 months.
  • Other Capital Spending - Plans for capital spending over the next 12 months.
  • Training and Development - Plans for spending on employee training and development over the next 12 months.
Other significant shifts included organizational optimism and expansion plans, which dropped below fourth quarter, 2011 levels. The decline in optimism for organizations and expansion exceeded the decline in optimism for the US economy. 
 
The expectations of CPA executives in small businesses differed somewhat from those of executives in large businesses in expansion and hiring. Less than half of small businesses expect to expand in the next 12 months, but only 20 percent expect to contract; 26 percent of very large businesses expect to contract. Small businesses are least likely to have excess employees and are most hesitant to hire.
 
Plans to increase employment showed a continued, steady decline. Only 8 percent of organizations indicated they are planning to hire. This is down from 9 percent last quarter, but down from 14 percent in the first quarter. The percentage of executives planning to hire increased for the technology sector and decreased in the health care-other category. Expectations for inflation remain stable. 
 
Expectations for investment in information technology, training, and capital spending are all below levels from a year ago, reflecting a decline in year-over-year expectations. 
 
The top five challenges to the economy are unchanged from the third quarter: domestic economic conditions is seen as the top challenge, followed by regulatory requirements/changes, domestic political leadership, employee and benefits costs, and stagnant/declining markets.
 
In the "Survey within a Survey," when asked their preferences for addressing the federal deficit and debt, overall, respondents favor more spending cuts than revenue increases: 
  • 45 percent favor spending cuts and revenue increases, with more cuts than increases.
  • 23 percent want primarily spending cuts.
  • 23 percent want a balance of cuts and increases. 
CPA executives showed a lack of confidence in Washington in other areas:
  • Negative expectations for an end to gridlock in Washington increased a stunning 20 percent over the third quarter, from 54 percent to 74 percent.
  • A majority of respondents (42 percent) do not expect comprehensive tax reform legislation in 2013.

 

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