AICPA Business & Industry U.S. Economic Outlook Survey 3Q 2013

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1 AICPA Business & Industry U.S. Economic Outlook Survey 3Q 2013

2 The CPA Outlook Index The CPA Outlook Index (CPAOI) is a broad-based indicator of the strength of US 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. CPA Outlook Index - 00 The CPA Outlook Index (CPAOI) held steady at 69 for the third quarter of 2013, despite a 4 point decline in the index component for US economic optimism and a one-point decline in the index component for organization optimism. Declines in these overall components were offset primarily by improvements in expansion plans, revenue, profits and employment components of the CPAOI. Spending plans continue to be positive but remained essentially constant with 2Q.

3 The CPA Outlook Index The CPAOI is a robust measure of sentiment about the US 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: US 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%].

4 Outlook for the US Economy and Organizations Expansion plans hold steady despite softening of optimism about US Economy After rising to the highest post-recession level at 2Q 2013, the percentage of respondents who are optimistic about the US economy fell in the third quarter from 49% to 44%. Fortunately, this softening in optimism about the US economy translated to only a two percentage point decline in respondents who are optimistic about the prospects for their own organization from 57% to 55%, and the number of companies who expect their businesses to expand held constant at 62%.. Those who continue to be optimistic cite improvements in housing and construction and consumer spending as the most significant factors influencing their decision, followed by the employment situation. The challenges of healthcare reform and the Affordable Care Act, and political leadership were cited as the most significant factors by those with a neutral or pessimistic view. Outlook for the US Economy, Organizations & Expansion Concerns about inflation continue to be relatively low 35% of CPA respondents are concerned about the prospects for inflation over the next six months, slightly up from 30% in 2Q; only 7% expressed concerned about deflation which remains consistent with 2Q Labor costs, which surpassed raw materials costs as the factor representing the most significant risk to business in the second quarter 2013, continue to be the greatest concern and increased again from 28% of respondents in 2Q to 31% in 3Q. Concern about interest rates also rose this quarter to 26% of respondents, up from 21% in 2Q. These increases were offset by corresponding declines in concern about both raw materials and energy costs.

5 Inflation and Deflation Key Performance Indicators Expectations for revenue, profits and headcount continue to improve After declining through 2012 to levels in the fourth quarter that we had not seen since the early recovery quarters of 2010, expectations for increases in revenues, profits and headcounts rebounded in the first and second quarters of 2013 and continue the rebound in 3Q Revenues are currently expected to increase at a 3.3% rate, profits at 2.5% and headcounts at 1.3%. Expectations for Revenue, Profits and Staffing

6 Respondents expectations for prices continue essentially unchanged. Prices paid are expected to increase by 1.9% over the next twelve months while prices charged are only anticipated to increase by 1.3%. Perhaps consistent with the increase in concern about labor costs as an inflation risk, expectations for salary increases inched up to 2.3% in the third quarter from 2.2% in the first and second quarters of 2013 and 1.9% in the second, third and fourth quarters of Expectations for healthcare cost increases continue to be higher than other costs and increased again slightly in 3Q to 6.8% after jumping from 6.3% to 6.7% last quarter. Spending plans remain constant after 1Q 2013 improvements. IT spending is expected to increase 2.7% over the course of the next twelve months, which is down from 2.8% last quarter. Spending on other capital which also bounced back slightly in the first half of 2013 is expected to increase 2.2%, unchanged from 2Q. Training spending plans also remained unchanged at a 1.3% rate. R & D spending is scheduled to increase at 1.0%, unchanged from last quarter. Hiring Plans Percent of companies planning to hire increases Slightly more than half of all companies (53%) continue to say they have the right number of employees and only 11% say they have too many. The number of companies that say they have too few employees but are hesitating to hire remained below 20% for the second straight quarter. The number of companies with too few employees who plan to hire increased to 12% in 1Q and 2Q 2013 to 15% in 3Q, which is a post-recession high for this measure. Staffing Relative to Needs

7 Industry, Region and Business Size Outlook Retail trade is now the strongest sector and wholesale trade shows most improvement Consistent with the positive sentiment among optimistic respondents about consumer spending noted above, retailers now lead in terms of optimism with 62% of retail respondents being optimistic about their prospects in spite of a slight decline of 2 percentage points from 2Q. Wholesale trade showed the most improvement with 58% indicating optimism compared with only 48% at 2Q 2013 and 41% looking back to 3Q Finance and insurance showed slight additional improvement from 59% to 61% this quarter. Construction held constant at 59% after three consecutive quarters of gains. Technology and manufacturing both dropped off slightly in 3Q to 56% optimistic, giving back their gains from the previous quarter. Real estate and professional services also gave up 4% and 5% respectively of the significant gains they experienced in 1Q Healthcare providers continue to be the least optimistic with 37% optimistic about their prospects. In terms of regional perspective the South was the only region to avoid a decline in optimism. Despite a slight decline in overall optimism this quarter, improvement in the rate of hiring is expected by both technology (2.1% to 2.6%) and professional services (1.6% to 1.9%). The construction industry expects to continue at the same rate of 2.1%. In spite of the retail trade segment leading in terms of optimism, their expected rate of hiring declined from 2.1% to 1.8%. On the other hand, a full percentage point improvement in hiring rates is expected by both wholesale trade (0.5% to 1.5%) and the real estate and property segments (0.6 to 1.6%). Finance and insurance expects to continue expanding headcount at a 1.2% rate, while manufacturing is expecting to ease off slightly from 1.2% to 1.0%. Both healthcare providers and healthcare-other companies now expect hiring to be in the 0.5% range. Expected Employment Change by Industry

8 From early 2010 through 2011 the largest of companies - those with revenues in excess of $1 billion, seemed to be leading the recovery, outpacing smaller companies in terms of the percentage of respondents reporting that they expected their businesses to expand during the ensuing twelve months. In the first quarter of 2012, there was a break in this trend and we saw a steady decline in the percentage of large companies with expansion plans through each quarter in In the fourth quarter of 2012 there was no appreciable difference between the three larger size categories of companies, each with only slightly more than half of their respondents expecting to expand their businesses. The gap between the three larger size categories of companies and the smallest companies was also the greatest at this juncture. In 2013 the number of optimists in each category made significant improvements. Led once again by the largest category of companies at 68%, the percentage of optimistic companies in each of the three largest categories is greater than 60%. While the percentage of companies in the category of revenues less than $10 million in revenue has not reached this level, it has shown improvement in each quarter of 2013, reaching 56% this quarter. Expansion Plans by Business Size These plans for expansion among companies also appear to be translating into plans for hiring as well. As noted above, the percentage of companies with plans for hiring increased to 15% overall. At the large end of the scale, while there continue to be more companies in the revenue > $1 billion category than in the other categories that are reluctant to hire (24%), more of the largest companies also have plans to hire (19% in 3Q vs. 15% in 2Q),. At the other end of the scale, companies in the category of revenues < $10 million are also more inclined to hire than they have been. Of small companies with too few employees, those with plans to hire increased from 9% in 2Q to 16% in 3Q, and those who are reluctant to hire dropped from 25% in 2Q to 20%.

9 Hiring plans by company size Liquidity Overall liquidity remains strong for most organizations; reluctance to deploy excess capital among the largest companies declines; more small companies expect to raise needed capital but continue to face greater challenges than large ones The majority of the respondents organizations continue to have at least as much cash with only 22% needing to raise capital; this slightly up from 19% 1Q. On an overall basis, 37% percent have more than they need and 42% have about the right amount. The number of companies expecting to deploy excess liquidity increased again this quarter to 16%. While overall there is some reluctance to deploy excess capital (21%) the percentage of large companies with revenues in excess of $1 billion that are reluctant fell to 17% from 25% last quarter. The number of smaller companies with revenues < $10 million that plan to raise capital increased from 10% in 2Q to 15% in 3Q, and those that expect availability and/or pricing to be a barrier declined from 19% to 16%. Overall the majority of respondents (54%) continue to believe that obtaining credit would not be more or less difficult than in previous quarter. The percentage who expect it to be more difficult returned to 12% from 9% last quarter and here again small businesses are more concerned as 14% felt it would be more difficult while only 5% of very large businesses felt that way.

10 Top Challenges Challenges facing business consistent with slight shifts noted last quarter In the second quarter, regulatory requirements/changes took over as the top challenges facing businesses, bumping domestic economic conditions to the second position. This ranking continued through the third quarter along with the third through sixth rankings of employee and benefits costs, domestic competition, domestic and political leadership and availability of skilled personnel. Development of new products/services/markets continues to be an increasing challenge moving from the eighth to the seventh position while stagnant/declining markets continues to be less of a challenge, falling another spot in the ranking from seventh to eighth. Changing customer preferences which made the top ten ranking for the first time in the second quarter held its ninth place spot. Global economic conditions also held its spot rounding out the top ten.

11 Organization Innovation Executive management seen as most effective contributor to innovation efforts This quarter s survey within a survey focused on innovation efforts within the organization and the contributions of various functions. Nearly three-quarters (74%) of respondents indicated that executive management contributes to innovation to a large or extremely large effect. Operations staff (45%) and sales and marketing staff (35%) also contribute to a large or extremely large extent to innovation efforts. Board members (18%) and human resources (8%) are less involved. Only 30% of respondents believed finance and accounting contributes to innovation to a large or greater extent; yet 74% of respondents believe the finance and accounting function should play an important or extremely important role in innovation efforts. Finance and Accounting Regulatory hurdles (41%) and lack of budgetary resources (34%), followed by organizational aversion to risk (30%) and organizational processes and/or policies (27%) were cited as the most significant impediments to innovation efforts. An innovative culture (31%) and incentives for employees who innovate successfully (17%) were cited as the most significant drivers of innovation. Impediments to Innovation

12 Survey Background The survey was conducted of AICPA Business & Industry members between August 13 and August 29, 2013 and had 1228 qualified respondents. CFOs comprised 46% of the respondents, 23% were Controllers, 11% were CEOs or Presidents, 10% were VPs, 2% were COOs; the remainder were Directors or other executives. Sixtyeight percent of respondents came from privately owned entities, 16% from publicly listed companies, 12% from not-for-profits, 1% from government and 1% from other. Eleven 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, 45% from organizations with $10 million to $100 million and 21% from organizations with under $10 million in revenues (numbers may add to more than 100 due to rounding).