AICPA Business & Industry U.S. Economic Outlook Survey 2Q 2015

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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 02

The CPA Outlook Index (CPAOI) decreased 2 points

in the second quarter of 2015. A 12 point decline in

optimism about the US economy in comparison to the

first quarter is tempered by less significant declines in

the expectations for respondents’ own organizations

and by slight increases in spending plans.

Year over year comparisons are flat overall, and

slightly softer for organizational expectations.

However, while employment continues to be the

weakest index, hiring and spending plans show

improvement compared to the second quarter of 2014.

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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%].

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Outlook for the US Economy and Organizations Optimism about the economy and organizational prospects taper after reaching new highs

The number of CPA executives who are optimistic about the economy declined to 52% in the second quarter of

2015, from highs of 64% in the first quarter of 2014 and 68% in the first quarter of 2015.

Following several strong quarters of improvement in CPA optimism about the prospects for their own

organizations through 2014, we saw a slight decline in the first quarter of 2015 from 67% to 63% optimistic. In

the second quarter we see a continued tapering to only 58% optimistic.

Those who are optimistic most frequently cited continued economic growth, the employment situation, and the

low cost of capital and energy as factors driving their opinion. Ongoing concern about the political/leadership

situation and the lack of real growth in the economy and employment were cited by the pessimists.

Outlook for the US Economy, Organizations & Expansion

Concerns about inflation continue to be relatively low. In the second quarter, 23% of CPA respondents are

concerned about the prospects for inflation over the next six months, consistent with the first quarter of 2014;

only 10% expressed concerned about deflation, which is down two points from the first quarter of 12%.

Raw materials costs appeared as the most pressing concern by 28% of respondents this quarter, displacing labor

costs, which continues to be the top concern for 26% of respondents. Labor costs had been the most pressing

concern for the past several quarters. Concern about energy costs (16%) and interest rates (21%) increased this

quarter by 5 points and by 3 points, respectively.

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Key Performance Indicators Outlooks for revenue and profits fall off further from Q4 2014 highs

Expectations for increased revenues fell off to 3.2% from the highs of 4.7 % we saw in the fourth quarter of

2014 and 3.6% in the first quarter of 2015. Expectations for profits also declined further to 2.4%, down from

3.9% in the fourth quarter of 2014 to 2.8% in the first quarter of 2015.

Expectations for Revenue and Profits

While respondents’ expectations for increased input prices dropped a tenth to 2.0%, and their anticipated ability

to increase prices charged for their products and services over the next twelve months increased a tenth to 1.4%,

the gap continues to be an issue as indicated by the concern about increases in raw material costs.

Expectations for healthcare cost increases continue to be higher than other costs but remained constant in the

second quarter at 5.8%.

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

consistent with the first quarter 2015 projection of a 3.1% increase. Other capital spending plans also remained

constant with the first quarter at 1.8%, while anticipated spending for training recovered to a 1.8% rate, after

falling off to 1.6% in the first quarter.

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Hiring Plans Hiring plans continue to be positive

Slightly more than half of all companies (55%) continue to say they have the right number of employees which

is up slightly from 52% in the first quarter. The number of companies that say they have too many employees

dropped a point to 9% in the second quarter. The number of companies that say they have too few employees

but are hesitating to hire declined a point to 14%, remaining well below the 20% mark that we saw in the

second quarter of 2014. The number of companies with too few employees who are planning to hire remained

consistent with the first quarter. At 21%, this is also still more positive than the readings in the teens during the

first half of 2014 and prior.

Staffing Relative to Needs

Industry, Region and Business Size Outlook Optimism mixed across sectors

Retail trade topped the charts this quarter in terms of optimism, making a leap to 85%, up from several quarters

with less than 70% of retailers being optimistic. This increase in optimism is supported by improved plans for

hiring. The retail sector also topped the hiring chart this quarter with an expected rate of headcount increase of

4.6%, up from only 1.8% in the first quarter of 2015. Wholesale trade also improved to 65% optimistic, up from

only 54% in the first quarter.

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Manufacturing eased off from 63% to only 55% optimistic in the second quarter and construction also fell off

sharply after topping the charts at 83% in the first quarter to only 64% optimistic this quarter. While the

expected headcount in manufacturing has fallen off from a 2.1% projection in the first quarter to only a .7%

increase expected going forward from this quarter, the expected increase in headcount in construction for the

coming 12 months recovered to 3.2% after dropping slightly in the first quarter to 2.7%.

Technology also dropped sharply to only 60% optimistic, after recovering to 80% last quarter from a sharp

decline to only 50% optimistic in the fourth quarter of 2014. The hiring projection for technology also improved

from 2.3% to 2.6% in the second quarter.

Finance and Insurance optimism improved from 66% to 74%. However, the expected headcount eased from

2.6% in the first quarter to 2.0% in the second quarter of 2015.

With respect to a couple of sectors that have had significant challenges recently, the projected headcount

increase in the banking sector improved from only .8% in the first quarter to a rate of 1.6% in the second

quarter, and after projecting a decrease in headcount of 2.9% in the first quarter, mining and natural resources

respondents are now projecting a .1% increase in headcount for the coming twelve months.

Expected Employment Change by Industry

In terms of regional perspective, the Midwest continues to be slightly more optimistic than other regions at 60%

optimistic. The West showed the most significant erosion in optimism, declining from 67% optimistic in the

first quarter to only 57% of respondents continuing to be optimistic in the second quarter.

Mining and Natural Resources

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Companies at the largest and smallest ends of the spectrum, in terms of revenues, showed the biggest declines in

expansion plans in the second quarter. Companies in the revenue greater than $1 billion category with

expansion plans declined from 77% to only 53%. The percentage of those with revenues less than $10 million

having plans to expand in the coming months declined from 59% in the first quarter of 2015 to only 47% in the

second quarter.

Optimism in the $10 - $100m range improved from 63% to 66% in the second quarter, and the $100m to $1b

category eased only slightly from 67% to 65%.

Expansion Plans by Business Size

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Top Challenges Regulatory requirements continue to top the list followed by employee and benefits costs

Regulatory requirements/changes maintained the number one ranking, while employee and benefits costs

moved up another slot to the number two most significant challenge this quarter.

Domestic economic conditions jumped up two positions to number three from the number five slot; however,

domestic competition move down three notches to number five after moving into the number two slot last

quarter.

Availability of skilled personnel maintained its 4th place ranking, and developing new products/services/

markets moved up one slot from number seven to number six, while domestic political leadership dropped from

number six to number seven.

Materials, supplies and equipment costs moved from the tenth to the eighth slot, switching places with changing

customer preferences which dropped from number eight to number ten. Financing challenges, in terms of either

access, or cost of capital made an appearance in the number nine slot.

Top Challenges Facing Organizations

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Survey within the Survey

Mergers and Acquisitions - The first quarter saw more U.S. merger and acquisition activity than any similar

period since 2000. CPA executives indicated the following about where their businesses stand on M&A at this

point in time.

M&A Activity

Technology Investment – IT spending has been one of the strongest areas of spending over the course of the

recession and recovery. Businesses planning on increasing their investment in technology over the next twelve

months indicated the top two reasons motivating their investments as summarized below.

Technology Investment Motivation

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Survey within the Survey (cont’d)

Cash Holdings – While many companies have been maintaining greater liquidity reserves over the course of

the economic recovery, some are beginning to reduce their corporate cash holdings. Only 26% of CPA

executive’s companies are planning on reducing their corporate cash balances over the course of the next twelve

months. Another 15% are planning to add to their liquidity holdings, while 59% are planning to maintain their

liquidity holdings.

For those who indicated that they are reducing balances, their plans for the cash include the following (more

than one category could be selected):

Plans for Cash

Survey Background

The survey was conducted of AICPA Business & Industry members between May 12 and May 27, 2015 and

had 570 qualified respondents. CFOs comprised 61% of the respondents, 29% were Controllers, 1% were CEOs

or Presidents, 3% were VPs, 1% were COOs; the remainder were Directors or other executives. Seventy-one

percent of respondents came from privately owned entities, 10% from publicly listed companies, 18% from not-

for-profits. Seven 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, 53% from organizations with $10

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million to $100 million and 18% from organizations with under $10 million in revenues (numbers may add to

more than 100 due to rounding).