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CPA Financial Executives Say a Double-Dip Recession a Possibility

Top concerns identified.

September 2011
by AICPA Communications

CPA executives’ concerns over financial and political instability have driven their optimism about the U.S. economy to a two-and-one-half year low, fueling concerns about a double-dip recession, according to the AICPA Business & Industry Economic Outlook Survey Q3 2011.

The survey, which was performed between August 10 and August 29, 2011, shares the expert insights and opinions of more than 1,300 CFOs, CEOs/presidents, controllers and other financial leaders for the third quarter of 2011. Survey participants represent the full range of organizations and findings are categorized by industry, region and enterprise size.

Optimism Makes a Swift Retreat

The CPA Outlook Index (CPAOI) declined eight points to 58 this quarter and is at the lowest level since the first quarter of 2010. All components declined this quarter, the most significant decline being optimism about the U.S. economy. On a scale from zero to 100, a reading above 50 indicates a generally positive outlook with increasing activity, below 50 a generally negative outlook with decreasing activity and 50 a neutral outlook. The index showed a similar decline in sentiment about the U.S. economy in late 2007 and early 2008 as the U.S. slipped into a recession ahead of the financial crisis.

A majority (59%) of CPA decision-makers are “pessimistic” or “very pessimistic” about the outlook for the U.S. economy. A scant nine percent have a positive outlook, which is a steep 24 percent decline from the second quarter and the lowest level since the first quarter of 2009. A significant 61 percent now believe it is “somewhat likely” or “very likely” that the U.S. economy will experience a double-dip recession. “For the second consecutive quarter, the CPA Outlook Index declined as turbulence in the political and economic environments eroded the sense earlier this year that a recovery was taking hold,” said Carol Scott, CPA, AICPA vice president for business, industry and government. “A majority of our CPA members in executive financial roles now fear a second recession may be likely.”

CPA executives have higher hopes for their own organizations, though to a measurably less degree than in the past. A more modest 41 percent responded that they are “optimistic” or “very optimistic” about their prospects over the next 12 months, which is down 13 percent from three months ago and the lowest level since the fourth quarter of 2009. Twenty-one percent are “pessimistic” or “very pessimistic” — a four-percent jump from the prior period.

Overall, quarter-to-quarter optimism declined across all industries and regions, with the technology industry remaining the most optimistic and construction continuing to be the least.

CPAs Share Insights Into Inflation and Staffing

Inflation is the survey area that experienced one of the greatest quarter-to-quarter changes. When CPA decision-makers were asked which concerned them more over the next six months, inflation or deflation, only 38 percent chose inflation, which is a radical departure from the second quarter’s 61 percent.

Although inflation concerns dropped radically since the second quarter, raw materials costs again triumphed over all other inflationary factors with 33 percent identifying them as the number-one risk to their business. Labor costs came in second (23%), followed by energy costs (17%) and interest rates (16%). This is the first time labor costs have occupied the second position and outranked energy costs and interest rates. “Labor costs’ debut in the second-place position reflects the crisis in confidence that continues to plague many decision-makers and further contributes to their reluctance to hire in a slow- to no-growth environment,” said James Morrison, CFO of Teknor Apex Company. “In addition to these immediate negative consequences, strong labor-cost concerns can jeopardize the long-term innovation and progress that is built on an organization’s ever-evolving workforce.”

For the most part, employment levels are holding their course, with a majority (58%) of respondents having the right amount of employees. On the other hand, only 10 percent of organizations have too few employees and are planning to hire in the immediate future and twice as many have too few employees but are hesitant to hire until economic conditions become more certain. The largest increases in hiring are expected in the technology industry and by health care providers.

CPA Executives Identify Top Concerns

When the economic pendulum swings toward instability and volatility, the type, scope and degree of many organizational challenges can change suddenly, dramatically and unpredictably.

Among the challenges of most concern to CPA decision-makers, customer demand is by far the leading concern and maintains its long-held position for 15 consecutive quarters. Political and economic instability made a rapid ascent from fourth to second place since the previous quarter, marking its first time in that position since this question was added to the survey in the first quarter of 2011 and placing it among the three most important challenges. “The exalted, and not entirely unexpected, position of ‘political and economic instability’ reflects business executives’ heightened uncertainty in financial markets, growth rates and government,” said Morrison. “During unstable times, mounting intangibles make strategic scenario-planning extremely difficult for leaders, often resulting in inaction on their part and additional barriers to success.”

Rounding out the remaining top-five challenges are regulatory requirements, employee healthcare costs and materials/supplies/equipment costs. This is the first time in more than two years that employee healthcare costs fell from the second position.

Deficit Reduction Plan Generates Mixed Reviews

Survey participants are divided on the key features of the deficit-reduction plan. For example, in a “select all that apply question,” 60 percent believe that the plan should have included more spending cuts, while nearly half as many believe it should have included tax-revenue increases.

When asked to identify the impact of the plan’s spending cuts on their business, the greatest number of executives chose “minimal” (47%), followed by “slight” (27%) and “moderate” (21%). Only five percent are expecting a significant impact.

Go to www.aicpa.org/cpaoutlook to receive a complimentary copy of the complete survey results.

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Copyright © 2011 The American Institute of Certified Public Accountants.