At first glance, “stable” is the one word that can be used to summarize the overall results of the 3Q 2007 Economic Outlook survey of CPA decision-makers. After improving in 1Q 2007, optimism about the US economy dropped in 2Q 2007 and remained consistent quarter to quarter from Q2 to Q3 2007. There continues to be a significant gap between the level of optimism about the economy as a whole and the economic prospects for respondents’ own organization. This quarter 47% of respondents said they were optimistic or very optimistic about the economic prospects for the US in the next 12 months while 65% expressed optimism about the prospects for their own organization. When asked about their state’s economic outlook 45% expressed optimism. In 2Q 2007 the percentage expressing optimism for the US, their organization and their state were 48%, 66% and 47% respectively – insignificant differences. Results on questions concerning sales, profits, cost, spending and hiring plans remained similarly consistent.
Optimism for organizations was backed up again this quarter with continued expectations of business expansion. When asked whether they expected their business to expand or contract this year 66% expected their business to expand with 16% expecting it to expand a lot. Only 15% expected contraction.
A deeper look at the survey reveals some divergence in optimism about the US economy depending on the size of the organization. The larger the respondent’s organization, the more likely the respondent was to be optimistic. Respondents from the largest organizations – defined as having over $1 billion in annual revenue – were the most optimistic with 55% answering that they were optimistic or very optimistic about the outlook for the US economy. Respondents from the smallest organizations – those with under $10 million in annual revenue – were the least optimistic with only 45% indicating that they were optimistic or very optimistic. These differences were not seen in the 2Q survey. When answering about their own organizations, optimism was about the same across all organization sizes.
Leadership in Public Policy
One of the more notable results in the survey is the role that these financial decision-makers believe companies and their executives should play in public policy issues. When given three options for the role executives should play in public/social policy issues such as healthcare, social security and the environment, 56% of respondents answered that “companies and their executives should take a leadership role” while 36% felt “companies and their executives should be involved in public policy issues only to the extent they relate to strategic objectives” and only 7% felt “companies and executives should focus solely on providing returns to their shareholders.”
These views were fairly consistent across positions and industries but differences were evident among the various types of organizations. Respondents from privately held organizations showed a marked preference for taking a leadership role with 57% of respondents choosing that response and only 35% choosing involvement only to the extent that they impact strategic objectives. Respondents from publicly held companies were much more evenly split between those 2 options (43% favored the strategic objectives option while 47% opted for the leadership option) while respondents from Government, Education and Non-Profits favored leadership over strategic objectives by a 61% to 34% margin.
Housing and Mortgage Concerns Continue; Energy Concerns Subside
In 2Q the key concerns driving the drop in optimism about the US outlook from 1Q were the housing market and fuel prices. In 3Q the concerns about the housing market remain and have expanded somewhat to include concerns about the mortgage market. Meanwhile concerns about fuel prices, which were quite pronounced in 2Q, have subsided somewhat. From 1Q to 2Q the number of respondents seeing energy cost or availability as a challenge jumped from 54% to 66%. In 3Q that number has dropped back down to 59%.
Again this quarter staff related issues – cost, availability and retention accounted for 4 of the top 5 challenges organizations face, with regulatory challenges rounding out the top 5. In addition, numerous respondents expressed concern about the overall political climate, federal and state government policies, the war in Iraq, inflation, and interest rates.
Industry Variations
Despite all the concerns about the housing market, respondents from the real estate industry were more likely to be optimistic about the US economy than most. Also optimistic were respondents from the manufacturing, retail trade and mining, oil and gas industries (although there were very few respondents from that industry they were so overwhelmingly optimistic they are mentioned). Respondents from the retail trade industry were definitely very split as they also represent one of the most pessimistic groups along with healthcare respondents.
Organizational optimism showed a different story depending on industry with respondents from the professional, scientific and technical services and finance and insurance industries the most optimistic and respondents from retail trade and construction the most pessimistic. This pessimism was backed up by the fact that respondents from these industries were more likely to indicate that they expected their organizations to contract in the next 12 months. Respondents from healthcare and professional, technical and scientific services were most likely to see expansion with 73% of healthcare respondents and 75% of services respondents expecting expansion. It should be noted that even for the most pessimistic industries expectations for expansion outnumbered expectations for contraction by at least a 2 to 1 margin.
Not surprisingly companies share some challenges but other challenges vary significantly by industry. Ninety-five percent of respondents indicated that employee costs (benefits and salaries) represented at least a minor challenge with 25% characterizing them as a major challenge. This was fairly consistent across industries although healthcare respondents were slightly more likely to classify it as a major challenge than others. Similarly while staff turnover and availability of professional skills are generally seen as challenges across all industries, respondents from the healthcare industry are somewhat more likely to see these as major challenges.
While foreign competition – from China and from elsewhere – are generally not seen as a challenge; that is not the case for manufacturing respondents. While only 27% of all respondents see competition from China as a challenge and 32% see other foreign competition as a challenge, 70% of manufacturing respondents saw foreign competition as a challenge and 67% saw competition from China as a challenge. Material costs were also a much larger challenge for manufacturing respondents than for anyone else.
Another question with strong differences between industries concerned regulatory requirements. Here healthcare and finance industry respondents outnumbered their peers by more than 2 to 1 with 46% of healthcare respondents and 42% of finance industry respondents answering that they were a major challenge. Overall, while 83% of respondents see regulatory requirements as a challenge, only 20% consider them a major challenge.
Survey Background
The survey was conducted of AICPA Business & Industry members between July 10 and July 31, 2007 and had 1470 qualified respondents. Half the respondents (50%) were CFOs, 20% were Controllers and 15% were CEOs or COOs. Sixty-five percent of respondents came from privately owned entities, 16% from public companies, 11% from government, education and not-for-profits and 6% from foreign owned companies. Ten percent came from organizations with annual revenues of 1 billion or more, 21% from organizations with $100 million to under $1 billion in annual revenues, 44% from organizations with $10 million to $100 million and 25% from organizations with under $10 million in revenues.
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