1st quarter 2020 executive summary - AICPA...1Q20 AICPA Business & Industry U.S. Economic Outlook Survey Executive Summary 2 CPA Outlook Index . The CPAOI is a robust measure of sentiment

1Q20 AICPA Business & Industry U.S. Economic Outlook Survey Executive Summary 1

Management Accounting & Finance

The CPA Outlook Index The CPA Outlook Index (CPAOI) is a broad-based indicator of the strength of U.S. business activity and economic direction that reflects the views of CPAs who are AICPA members in Business & Industry holding executive positions in both public and privately-owned organizations of all sizes, and across a broad spectrum of industries.

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20CPA Outlook

Index 74 72 71 69 63 68 69 74 76 75 77 79 81 79 79 76 76 75 72 72 76

74 72 71 6963

68 6974 76 75 77 79 81 79 79 76 76 75 72 72

76

Economic Outlook Survey 1st quarter 2020 executive summary

The CPA Outlook Index (CPAOI) rebounded to 76.

All index components up including U.S. Economic and Organization Optimism.

Expansion plans, revenue, and profit expectations all show gains.

A reading above 50 indicates a generally positive outlook with increasing activity.

A reading below 50 indicates a generally negative outlook with decreasing activity.


CPA Outlook Index

The CPAOI is a robust measure of sentiment about the U.S. economy that is supported by the unique insight and knowledge that CEOs, CFOs, Controllers, and other CPA executives have about the prospects for their own organizations, their expectations for revenues and profits, and their plans for spending and employment.

The CPAOI is a broad-based composite index that captures the expectations of our members and their plans for a breadth of indicators of economic activity. It is a composite of the following nine measures at equal weights:

U.S. Economy Optimism Respondent optimism about the US economy

Organization Optimism Respondent optimism about prospects for their own organization

Business Expansion Respondent expectations of whether their business will expand over the next 12 months

Revenues Expectations for revenue over the next 12 months

Profits Expectations for profits over the next 12 months

Employment Expectations for 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 & Development Plans for spending on employee training and development over the next 12 months

Each individual component indicator is calculated by taking the percentage of respondents who indicated that their opinion or expectation for the metric is positive or increasing and adding to that half of the percentage of respondents indicating a neutral or no-change response. A reading above 50 indicates a generally positive outlook with increasing activity. A reading below 50 indicates a generally negative outlook with decreasing activity.

As an example, if 60 percent of respondents indicate an optimistic or very optimistic view, and 20 percent express a neutral view, the calculation of the component indicator would be 70 [60% + .5 x 20%].

Component 1Q19 2Q19 3Q19 4Q19 1Q20 ∆Q to Q ∆Y to YU.S. Economic Optimism 72 70 60 64 74 10 02Organization Optimism 77 75 72 73 78 05 01Expansion Plans 76 75 72 71 75 04 01Revenue 82 81 76 76 81 05 01Profits 75 72 70 71 73 02 02Employment 71 71 68 70 71 01 00IT Spending 80 80 80 80 81 01 01Other Capital Spending 74 74 74 71 74 03 00Training & Development 75 73 72 72 73 01 02Total CPAOI 76 75 72 72 76 04 00


Outlook for the U.S. Economy and Organizations Optimism for the U.S. Economy, organization, and expansion improves overall, concerns about coronavirus significantly impact late-month responses.

The percentage of CPA executives who are optimistic about the U.S. economy recovered from 50% in the fourth quarter to now 61% of respondents continuing to be optimistic. Optimism about respondents’ own organizations rebounds with the first quarter at 66% optimism. Expansion plans Expansion plans also rebound to 64% overall. Small company expansion plans up from 52% to 62% quarter over quarter.

Optimists cite continued strong employment, low inflation, economic, real estate and equity market strength.

Pessimists cite length of recovery, ongoing political divisiveness, and concern about potential effect of election. Coronavirus concerns in particular impacted responses at end of month.

Outlook for the U.S. Economy, Organizations & Expansion

The increased concern about inflation seen during much of 2019 continued to ease, with now only 17% being concerned. The level of concern about deflation also declined from 8% in the fourth quarter to now only 7% of respondents having that concern.

Labor costs continue to be the highest-ranking inflation concern for 46% of respondents, down from 47% in the fourth quarter. Interest rate concerns eased in the first quarter; only 12% now rank interest rates as their top concern. Raw materials cost concerns remained constant at 26%. Energy cost concerns remained the top concern for only 6%.

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20U.S. 69% 64% 64% 74% 79% 74% 69% 57% 57% 57% 42% 50% 61%

Organization 66% 64% 66% 70% 71% 70% 69% 68% 65% 62% 58% 58% 66%

Expansion 67% 64% 65% 71% 72% 70% 70% 67% 66% 63% 61% 59% 64%

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Coronavirus Impacts on Optimism While early February optimism about Global and U.S. Economy show gains; late month responses reflect significant declines in wake of spread of coronavirus and related impact on markets.

Global and Domestic Economic Optimism - Analyzing the late-month responses to the final survey reminder on February 25 provides the following perspective of the impact of the coronavirus on optimism about the global economy and the US Economy.

Global Economy Outlook – Coronavirus Impact

US Economy Outlook – Coronavirus Impact

Optimism about the global economy declined from 35%% optimistic among the early responders to only 24% among the late responders; conversely, the percentage of pessimistic responses doubled from only 18% to 36%.

With respect to the impact on the U.S. Economy, optimism declined ten points between the early to late responders, dropping from 63% to 53% optimistic; similarly, pessimism increased by ten points from only 11% to 21% pessimistic.

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TOTAL EARLY RESPONSES

LATE RESPONSES

33% 35%24%

45% 46%40%

22% 18%

36%

Optimistic Neutral Pessimistic

0%10%20%30%40%50%60%70%


LATE RESPONSES

61% 63%53%

26% 26% 26%13% 11%

21%



Organization prospects – The concern about the impact of the coronavirus on the global and domestic economies also had a corresponding impact on our respondents view of the prospects for their organization with optimism declining from 68% among the early respondents to 57% among the late-month respondents.

Organization Prospects – Coronavirus Impact

A limited number of our respondents actually made adjustments to their revenue and profitability forecasts in response to coronavirus concerns, However, the increase in concern about potential widespread impact is reflected by the decrease in businesses who do not anticipate needing to make any adjustments from 42% to only 25% among the late-month respondents.

Business Forecast Adjustments – Coronavirus Impact

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LATE RESPONSES

66% 68%

57%

23% 22%

33%

10% 11% 10%


25%

62%

11%

2%

42%

51%

7%

1%

0% 10% 20% 30% 40% 50% 60% 70%

No, and don't expect we'll need to.

No, but keeping an eye on situation.

Yes, but currently only minor downwardadjustments.

Yes, we have made significant downwardadjustments.

All Responses Late Month Respnses


Key Performance Indicators Early February optimism about Global and U.S. Economy show improved expectations for revenue and profits, and for anticipated spending plans

Revenues are now expected to grow at a rate of 4.3%, up from 3.4% in the fourth quarter. Profit expectations also continued to grow, up from 2.7% in fourth quarter to 3.3%.

Expectations for Revenue and Profits

Reported spending plans for the upcoming twelve months also show improvement. IT spending continues to lead the pack, improving a tenth to an expected 3.6% rate of increase. Spending for training is expected to increase at a rate of 2.1%, up two tenths. Other capital spending plans recovered four tenths from 2.5% to 2.9%.

Marketing spending plans rebounded further, now expected to increase at a pace of 2.0% up from 1.6% going forward. Anticipated spending for R&D spending remained constant at 1.7%.

Salary and benefit expected cost gains one tenth to 2.6%. Expected Healthcare cost projections decreased a tenth from an expected rate of increase of 5.2% to 5.1%.

The expected increase in “other input prices” remained constant at 2.3%. On the other side of the equation, the expected ability to increase “prices charged” gained from 1.8% to 2.0%.

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20Revenue 1.7% 3.0% 2.9% 3.6% 4.3% 3.9% 4.3% 4.8% 5.0% 4.8% 5.0% 4.3% 4.4% 4.2% 3.5% 3.4% 4.3%Profit 0.7% 1.5% 2.3% 3.1% 3.5% 3.2% 3.5% 3.8% 4.4% 4.0% 4.3% 3.4% 3.6% 3.1% 2.8% 2.7% 3.3%

-10.0%

-8.0%

-6.0%

-4.0%

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4.0%

6.0%

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Hiring Plans More companies need employees and have plans to hire; small companies most reluctant

In this quarter 51% of all companies say they have the appropriate number of employees up 5 points from 46% in the fourth quarter. Those saying they have an excess number of employees decreased from 8% to 7% overall. The number of companies with revenues in excess of $1 billion having too many employees increased from 7% in the fourth quarter to 8% in the first quarter.

This quarter, 40% now indicate that they currently have too few employees, down from 43% last quarter. Of these, the percentage of companies that are planning to hire decreased 2 points from 28% to 26%. The percentage of those who are reluctant to hire decreased 1 point from 15% to 14%.

Staffing Relative to Needs

Employment plans by business size show a bit of a mixed picture:

o For employers with > $1 billion in revenues, 8% now have excess employees, while 38% have too few. Of those with too few employees, 20% remain hesitant while 18% are planning to hire.

o Of those in the $100 million to $1 billion category, 39% say they have too few employees; 28% are hiring; while 11% are hesitant.

o In the $10 - $100 million range, 42% now have too few employees; of those with too few, 31% have plans to hire; only 11% are hesitant

o Of employers with revenues < $10 million 40% have too few employees; 23% are planning to hire; 17% are hesitant.

We have an excessnumber ofemployees

We haveapproximately the

appropriate numberof employees

We have too fewemployees, but are

hesitating to hire

We have too fewemployees and are

planning to hireOther

1Q19 8% 48% 15% 26% 2%2Q19 6% 47% 16% 28% 3%3Q19 9% 51% 13% 25% 2%4Q19 8% 46% 15% 28% 3%1Q20 7% 51% 14% 26% 2%

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Industry, Region and Business Size Outlook Retail optimism drops further; manufacturing continues to recover; construction strong

Retail trade optimism drops from 63% to 57% optimistic. Expectations for retail hiring improve slightly, now increasing at a rate of 1.7% for the coming twelve months, vs. 1.6% in Q4.

Manufacturing optimism continues to recover, improving from 55% to 59% optimistic. Similarly, manufacturing hiring is also expected to rebound, from 1.0% in Q4 to now a 2.9% increase.

Construction optimism rebounded from 66% to now 83% optimistic. Real estate and property optimism held its Q4 gains, easing only a point to now 68% optimistic.

Expected Employment Change by Industry

Expectations for IT spending continue to be strong and IT optimism rebounded to 76% optimistic after falling to below 50% in Q4. However, expected hiring in the IT sector eased another seven three tenths from 2.1% to 1.4%.

Finance and Insurance optimism also held its gains, now 74% optimistic; professional services optimism rebounded from 61% in Q4 to 68% optimistic in Q1. Professional services hiring eased slightly, now expected to increase at a rate of only 2.1% going forward from Q1.

Healthcare optimism gave back its Q4 gains declining from 67% to only 54% optimistic in Q1. Healthcare hiring continues to lead the pack but eased from at an expected pace of 4.0% to now a rate of 3.0% going forward from the fourth quarter. Healthcare-other optimism also continued its rebound, jumping from 60% to 71% optimistic.

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Banking

Not for Profit

Finance and Insurance

Technology

Retail Trade

Trans & Distribution

Healthcare Provider

Construction

Professional Services

Manufacturing

Real Estate Property

Q1 Q4


Industry, Region and Business Size Outlook (cont’d) Regional optimism gained across the country

In terms of regional perspective, optimism in the Midwest gained 9 points from 58% optimistic to now 67% optimistic, and optimism in the South gained 7 points to 68%. Optimism in the Northeast recovered to 61% after dropping to 55% in the fourth quarter. Optimism in the West gained 4 points, improving from 63% to 67% of executives being optimistic about their prospects.

Expansion Plans by Business Size

Expansion plans:

o Expectations for expansion by businesses with revenues < $10 million improved 10 points, increasing from 52% to 62% having expansion plans.

o Plans for companies in the $10 - $100 million category eased 5 points from 59% to 64%. o Companies in the $100 million to $1 billion range gained 3 points to 65%. o Those with revenues in excess of $1 billion fell 5 points from 68%, back to 63%.

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20< $10 million 67% 62% 63% 64% 60% 63% 62% 52% 62%$10 to <$100 million 74% 69% 70% 70% 67% 66% 64% 59% 64%$100 million to <$1 billion 72% 71% 73% 62% 67% 63% 54% 62% 65%> $1 billion 76% 78% 74% 71% 66% 64% 63% 68% 63%

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49% of all businesses expect to expand a little in the next twelve months 16% expect to expand a lot 33% expect to contract a little or stay the same 2% expect to contract a lot


Top Challenges Availability of skilled personnel continues to be most challenging

Availability of skilled personnel continues as the top challenge

Domestic competition moves up 1 spot to #2

Domestic economic conditions drop to #3

Domestic political leadership jumps 2 spots to #4

Regulatory requirements jump 1 spot to #5

Employee and benefit costs drops 2 spots to #6

Developing new products and services moves up 1 spot to #7

Staff turnover drops 1 spot to 8th place

Global economic conditions come in at #9, returning from 7th in 4Q2015

Materials/supplies/equipment costs returns to the 10th position after falling off in 2Q2019

Top Challenges Facing Organizations

1Q19 2Q19 3Q19 4Q19 1Q20

1 Availability of skilled personnel

Availability of skilled personnel




2 Domestic competition Employee and benefits costs Domestic economic conditions

Domestic economic conditions Domestic competition

3 Employee and benefits costs Domestic competition Domestic political leadership Domestic competition Domestic economic conditions

4 Regulatory requirements/changes

Regulatory requirements/changes Domestic competition Employee and benefits costs Domestic political leadership

5 Domestic political leadership Staff Turnover Employee and benefits costs Regulatory requirements/changes

Regulatory requirements/changes

6 Domestic economic conditions

Domestic economic conditions

Regulatory requirements/changes Domestic political leadership Employee and benefits costs

7 Materials/supplies/ equipment costs

Materials/supplies/ equipment costs Staff Turnover Staff Turnover Developing new

products/services/markets

8 Changing customer preferences Domestic political leadership Stagnant/declining markets Developing new

products/services/markets Staff Turnover

9 Staff Turnover Developing new products/services/markets

Developing new products/services/markets Stagnant/declining markets Global economic conditions

10 Financing (access/cost of capital)

Changing customer preferences



Materials/supplies/ equipment costs


Survey within the Survey Coronavirus impacts and responses

The concern about the impact of the coronavirus on the global and domestic economy and on respondents’ businesses is highlighted above. The aspects of businesses that have already impacted at the time of this survey are primarily China-related business operations.

Aspects of Business Affected

Other impacts on businesses included:

• Market volatility (Investments) • Restricted travel/disruptions • General economic decrease • Less demand for oil • Increased health awareness • Potential US domestic exposure • Employee distraction

In addition to preparing for possible outbreak and monitoring, adding quarantine requirements for staff and reducing travel overall, business responses included:

• Adjusted production runs • Marketing plans changed • More local sales leads • Investment value reduced


Survey Background

The survey was conducted of AICPA Business & Industry members between February 4 - 26, 2020 and had 867 qualified respondents.

CFOs comprised 43% of the respondents, 19% were Controllers, 15% were Presidents, CEOs, or other C-suite titles; 9% were VP/SVPs, 14% were accounting, audit, tax, technology directors or managers; the remainder were other executives.

Sixty eight percent of respondents came from privately owned entities, 15% from publicly listed companies, and 16% from not-for-profits.

Fourteen 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, 43% from organizations with $10 million to $100 million and 21% from organizations with under $10 million in revenues.

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1st quarter 2020 executive summary - AICPA...1Q20 AICPA Business & Industry U.S. Economic Outlook Survey Executive Summary 2 CPA Outlook Index . The CPAOI is a robust measure of sentiment