US economic optimism still neutral, but rising

US business executives are upbeat about their revenue and expansion plans in the next 12 months. But optimism about the US economy remains lukewarm, according to the first-quarter American Institute of CPAs (AICPA) Business & Industry Economic Outlook Survey.

The CPA Outlook Index (CPAOI) rose seven points to 66 – the second-highest CPAOI reading in the five years of the survey, tying the second quarter of 2011. Each of the nine components that make up the index increased from the previous quarter, led by US economic optimism, which jumped 14 points to 50. A reading above 50 indicates a generally positive outlook.

Despite the surge, the economic optimism figure indicates that some uncertainty lingers about the US economy. The main culprit: uncertainty in Washington.

In November, the US presidential election and looming fiscal cliff were heavy on the minds of CPA decision-makers. Now, they’re more confident in their own businesses but still wary of Washington.

“Now, we’ve gotten through all that. The stock market is at almost record highs, and businesses are still profitable,” said Jim Morrison, chairman of the AICPA Business & Industry Executive Committee. “I think people are feeling that with the slow growth, we can withstand a lot of things out there and that we’re not going to see a big drop-off. That gives people a little confidence.”

Morrison, the CFO of Teknor Apex, a materials science company in Rhode Island, said growth in housing has entered the psyche of survey respondents. Real estate industry optimism is up sharply, from 40 in the fourth quarter to 59 in the first quarter.

“They’re hearing that all sectors are starting to get on the positive side and that housing, which brought us into this mess to begin with, is at least bottoming out and prices are starting to rise,” Morrison said. “I think people see that and they feel, ‘We’ve hit bottom, and we’re on the way back.’ And they might even see some better things in the future.”

Reluctant to hire

Unemployment remains a concern in a low-growth economy. While 54% of respondents think their companies have the right number of employees, one-third say they don’t have enough workers. About two-thirds of those who have too few employees are reluctant to hire.

Two CPAs who took part in the survey feel good about their own businesses but still have concerns about the direction of the US economy.

“I’m really concerned about the never-ending government spending, the impact on the federal debt, and what the impact is going to be on my children’s generation,” said Ron Adams, CPA, the director and principal of Foxboro Consulting Group Inc. in Mansfield, Massachusetts.

Adams, who specialises in business valuations, said his firm has been plenty busy lately but that concerns about the direction of the federal debt lead him to remain pessimistic.

Adams’ thoughts are shared by Brent Smith, CPA, who works as a controller at a land surveying company in Chouteau, Oklahoma. Smith recently received news of planned highway improvement projects by the state of Oklahoma, which will keep his company busy.

His optimism doesn’t stretch much beyond state lines. “I strongly believe there will be continued inflation and [that] the cost of energy will choke any chance the economy has of rebounding,” Smith said.

Other findings in the survey include:

• Expectations for revenue and profit increased in the first quarter of 2013. Revenue is expected to rise 3% in the next 12 months compared with 2.1% the previous quarter, and profit is expected to increase at a rate of 2.1%, compared with 1.4% the previous quarter.
• Spending in all categories rose from fourth-quarter projections. IT spending increased from 2.1% to 2.7%, and spending on training rose from 0.7% to 1.3%.
• Despite concern about rising health-care costs, respondents’ expectations for health-care costs declined slightly, from 6.4% in the fourth quarter to 6.3%.
• Domestic political leadership has dropped out of the top three concerns of respondents. The top two remained the same – domestic economic conditions and regulatory requirements and changes. The new No. 3 this quarter is employee and benefit cost concerns.

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—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.