AICPA Business & Industry U.S. Economic Outlook Survey 4Q 2016

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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.

CPA Outlook Index 05 The CPA Outlook Index (CPAOI) increased 5 points in the

fourth quarter of 2016 to 74, matching the level last seen in the

first quarter of 2015.

Optimism about the U.S. economy made a significant jump

from 58 to 76, increasing an additional 18 points, optimism

about the prospects for respondents’ own organizations

jumped 6 points. Expansion plans, profit expectations,

employment and training and development spending all

increased in the fourth quarter.

CPA Outlook Index - 74

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The 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%].

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Outlook for the U.S. Economy and Organizations Optimism increased for economy, organizations, and expansion plans

The number of CPA executives who are optimistic about the U.S. economy increased significantly from 38% in

the third quarter to 62% in the fourth quarter after declining to 28% in the first quarter of 2016. The percentage

of those pessimistic also dropped from to 22% to 11%.

Organizational optimism increased from 53% to 61%. The percentage of companies with expansion plans

maintained at 62%.

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

Concerns about inflation and deflation flipped again this quarter, while not a significant concern in either

direction. After decreasing to 11% in the third quarter, 28% of respondents are now concerned about inflation.

Conversely, only 4% are now concerned about deflation, dropping from 18% in the third quarter.

Labor costs continue to be the most pressing concern for 43% of respondents, dropping from a high of 55% in

third quarter. Interest rate concerns follow as the top concern for 23%. Raw material costs increased from 18%

in third quarter to 20%. Energy cost concerns jumped back up to 10%, comparable to the 11% in the second

quarter of 2016.

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Key Performance Indicators Outlooks for improved profits still recovering

Expectations for increased revenues jumped to 3.6% after dropping to 2.9% in the third quarter of 2016.

Expectations for profits in the coming year continued their rebound, improving to 3.2%, up from 2.3% in the

third quarter after increasing to 1.5% in the second quarter.

Expectations for Revenue and Profits

IT continues to be the strongest category of planned spending over the upcoming twelve months and increased

to 2.9% after rising to 2.8% in the third quarter. Other capital spending plans also rebounded from 2.4% in the

third quarter to 2.7% in the fourth quarter. Spending for training and development remained constant at 1.6% in

the fourth quarter.

Expectations for healthcare cost increases continue to be higher than other costs, increasing to 6.1% after easing

off from 5.6% in the previous quarter.

The expected increase in “other input prices” increased to 2.4% from the 1.9% level seen in the third quarter of

2016. Fortunately, the expected ability to increase “prices charged” also improved to 1.8% in the fourth quarter,

after moving up from 1.5% in the third quarter.

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Hiring Plans Improved profitability and expansion plans also having positive impact on employment and spending

In the fourth quarter, 55% of all companies now say they have the appropriate number of employees. Those

saying they have an excess number of employees eased this quarter from 13% to 9%.

More than a third (35%) indicate that they currently have too few employees. Of these, the percentage of

companies that are planning to hire dropped a point from 21% in the third quarter to 20% in the fourth quarter.

The percentage of those who are reluctant to hire decreased from 17% in the third quarter to 15% in the fourth

quarter.

Staffing Relative to Needs

Industry, Region and Business Size Outlook Optimism improves in most sectors; remains constant in manufacturing and construction

Retail trade improved from 33% to 50% of respondents being optimistic in the fourth quarter. Retail hiring

continues to be soft, eased slightly to 0.8% from 1.3% in the third quarter. Wholesale trade optimism also

improved slightly from 45% in the third quarter to 48%.

Manufacturing optimism also improved from 47% to 55% in the fourth quarter. Hiring in the manufacturing

sector also improved and is expected increase at a rate of 1.7% for the coming twelve months.

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Construction optimism improved to 75%, up from 69% in the third quarter of 2016. The expected increase in

construction headcount improved from 1.0% to 2.0% in the fourth quarter. Real Estate optimism also improved

to 69% in the fourth quarter, up from 62% in the third quarter.

Finance and Insurance optimism improved from 57% in the third quarter to 66% in the fourth quarter. Hiring in

the Finance and Insurance sector maintained its expected rate of increase at 1.8%. However, hiring plans in the

Banking sector improved considerably, now with an expected increase of 2.3%, up from only 0.6% in the third

quarter.

Technology optimism eased slightly from 71% in the third quarter to 67% in the fourth quarter. Anticipated

Technology hiring returned to a more normal level of 2.0% in the fourth quarter, after jumping sharply to 4.9%

in the third quarter.

Professional Service optimism declined sharply from 67% in the third quarter to 48% in the fourth quarter.

Hiring in the professional service sector also eased a bit, but remains strong at 2.5%.

Expected Employment Change by Industry

Healthcare provider optimism continues to be strong with 69% now feeling positive about their prospects, after

falling off to only 38% optimistic in the fourth quarter of 2015. However, healthcare-other respondent optimism

jumped from 50% in the third quarter to 80% in the fourth.

In terms of regional perspective, the South improved from 48% optimistic in the third quarter to 68% in the

fourth quarter. The Midwest also recovered, improving from 53% to 62% optimistic in the fourth quarter. The

West improved slightly from 57% to 59%, while the Northeast gives up two points falling from 58% to 56%.

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Industry, Region and Business Size Outlook (cont’d)

Expansion plans and hiring plans by size of company were similarly mixed:

The number of companies with revenues < $10 million having expansion plans eased to 52%, down from 53% in

the third quarter;

Expansion plans for the $10-$100 million range of companies continued dropped to 63%; down 2 points from

65% in the third quarter

The $100 million to <$1 billion range of companies improved significantly to 67% from 59% in the third quarter

The percentage of companies with revenues > $1 billion having expansion plans eased off to 62% from 66% now

indicating they have little expansion plans for the coming year

Expansion Plans by Business Size

Employers with > $1 billion in revenues is the segment with the highest percentage of respondents with excess

employees (13%); they are also the segment with the most companies having too few employees (34%).

However, 22% of these largest companies with too few employees are hesitant to hire.

Employers with revenues < $10 million are also mixed - only 6% have excess employees. However, while 30%

have too few employees, only 11% are planning to hire; 19% are hesitant.

Employers with revenues in the $100 million to $1 billion category have the highest percentage with plans to hire

at 27%

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Top Challenges Primary challenges to business remain relatively consistent

For the most part, the factors that our respondents identified as major challenges to their business remained

relatively constant in the fourth quarter.

Regulatory requirements maintained their ranking at the top of the challenges list followed by employee and

benefit costs

Availability of skilled personnel, domestic economic conditions, domestic competition also remained in the top

five spots

Developing new products/services/markets moved up to the sixth place followed by domestic political leadership

which maintained its seventh place ranking

Changing customer preferences returned to the eighth spot after falling off 1Q16; Stagnant/declining markets

dropped three spots now ranking ninth

Staff Turnover returned to the number ten spot after falling out of the top ten after the fourth quarter of 2014.

Top Challenges Facing Organizations

4Q 15 1Q16 2Q16 3Q16 4Q16 1 Regulatory

requirements/changes Domestic economic

conditions Regulatory

requirements/changes Regulatory

requirements/changes Regulatory

requirements/changes 2 Domestic economic

conditions Regulatory

requirements/changes Domestic economic

conditions Domestic economic

conditions Employee and benefits

costs 3 Domestic competition Stagnant/declining

markets Availability of skilled

personnel Availability of skilled

personnel Domestic economic

conditions 4 Availability of skilled

personnel Domestic competition Domestic competition Domestic competition Availability of skilled personnel

5 Stagnant/declining markets

Availability of skilled personnel

Employee and benefits costs

Employee and benefits costs Domestic competition

6 Employee and benefits costs

Employee and benefits costs

Stagnant/declining markets

Stagnant/declining markets

Developing new products/services/markets

7 Global economic conditions

Domestic political leadership

Domestic political leadership

Domestic political leadership

Domestic political leadership

8 Changing customer preferences

Financing (access/cost of capital)

Developing new products/services/markets Liquidity Changing customer

preferences 9 Domestic political

leadership Developing new

products/services/markets Liquidity Developing new products/services/markets

Stagnant/declining markets

10 Global economic conditions

Domestic political leadership Energy costs Financing (access/cost of

capital) Staff Turnover

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Survey within the Survey Focus on impact of election results and liquidity

The fourth quarter “Survey within the Survey” focused on the impact of the results of the 2016 election and also

on business liquidity and related plans.

Impact of Election Results

A number of the election results questions followed up on questions that were asked in anticipation of the

election with respect to business spending plans and hiring.

When asked how much the outcome will be a consideration or factor in business planning, budgeting, or

forecasting during the coming year, 15% of respondents indicated that the election results would be a significant

factor, while 25% indicated the results would not be a factor. Of the balance 30% indicated the results of the

election would be a moderate factor and 30% indicated they would be a slight or somewhat a factor.

Impact of Election on Business Planning

In terms of job creation and hiring, only 9% of respondents indicated that the most likely actions now that the

election has been decided would be to increase hiring. While 9% indicated they would defer new hiring and

replace only essential personnel, only 2% indicated their most likely action would be to reduce new hiring.

The largest percentage of respondents (44%) indicated the election is not a factor in their hiring; similarly 36%

indicated they would continue to hire at their current pace. Of those with plans to hire, 71% indicated that full-

time positions would be the most likely type of position, rather than part-time, contract or temporary.

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Similarly, only 13% of companies indicated that their most likely actions concerning capital expenditures and

business expansion, including borrowing and financing, would be to increase capital expenditures and business

expansion spending; 6% indicated they would defer; 3% indicated it would be most likely to reduce spending.

The election outcome was not considered to be a factor in capital expenditures and business expansion plans for

38% of our executives; the balance of 40% indicated they will continue to spend at their current pace.

Most Likely Actions re: Capital Expenditures and Business Expansion

Liquidity

When asked to characterize their organization’s current liquidity holdings, 49% indicated that their current

position was about right, 18% indicated they currently have more liquidity than they need but are reluctant to

deploy, 14% indicated they have more than they need and plan to deploy. Of those with less than they need,

11% plan to raise capital, while 8% indicated that credit/capital availability and/or pricing is a barrier for their

organization.

With respect to our executives’ expectations for financing difficulty in the coming year, 58% indicated they

expected the challenge to be about the same, 13% indicated they expect it to be more difficult, an another 11%

expect it to be less difficult.

In terms of their plans for their level of corporate cash holdings, 59% indicate they plan to maintain their

holdings, while 14% indicated they plan to add to their liquidity holdings. Only 2% have plans to reduce their

holdings significantly, the balance of 25% have more modest plans for reductions.

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Survey Background The survey was conducted of AICPA Business & Industry members between November 9-30, 2016 and had

600 qualified respondents.

CFOs comprised 43% of the respondents, 20% were Controllers, 12% were CEOs or Presidents, 7% were VPs,

2% were COOs and 1% were CAOs; the remainder were Directors or other executives.

Sixty-nine percent of respondents came from privately owned entities, 17% from publicly listed companies, and

12% from not-for-profits.

Thirteen percent came from organizations with annual revenues of $1 billion or more, 22% from organizations

with $100 million to under $1 billion in annual revenues, 45% from organizations with $10 million to $100

million and 20% from organizations with under $10 million in revenues (numbers may add to more than 100

due to rounding).