AICPA Business & Industry U.S. Economic Outlook Survey 3Q 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 01

The CPA Outlook Index (CPAOI) decreased 1 point in

the third quarter of 2015 while year over year

comparisons are down from 2014 levels, quarter-to-

quarter changes in each of the components are minimal.

Revenue and profit expectations are showing

improvement over the second quarter of 2015, while

employment continues to be the softest component,

declining another point in the third quarter.

Component 3Q14 4Q14 1Q15 2Q15 3Q15 ∆Q to Q ∆Y to Y

U.S. Economic Optimism 69 78 80 68 67 01 02

Organization Optimism 78 80 76 73 73 00 05

Expansion Plans 79 81 74 72 72 00 07

Revenue 82 85 78 75 76 01 06

Profits 74 79 72 69 71 02 03

Employment 70 73 68 67 66 01 04

IT Spending 79 80 76 77 77 00 02

Other Capital Spending 74 75 71 72 72 00 02

Training & Development 73 75 70 71 69 02 04

Total CPAOI 75 78 74 72 71 01 04

CPA Outlook Index - 71

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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 dips below 50%; organization and expansion plans maintain

The number of CPA executives who are optimistic about the economy declined to 48% in the third quarter of

2015, falling below the 50% mark for the first time since the first quarter of 2014.

However, after tapering off in the second quarter from highs in the fourth quarter of 2014 and the first quarter of

2015, 59% of respondents remain optimistic about the prospects for their own organization, up from 58% last

quarter. Also, 60% continue to indicate that their organization has plans to expand over the upcoming twelve

months, down only a point from 61% in the second quarter.

Construction, employment and lower oil prices were cited as reasons for optimism, and lingering concerns

about regulation/leadership/political gridlock and about global economic turmoil were cited as the primary

reasons for those with pessimistic views.

Outlook for the US Economy, Organizations & Expansion

Concerns about inflation continue to be relatively low. In the third quarter, 25% of CPA respondents are

concerned about the prospects for inflation over the next six months, only two points higher than the 23% in the

second quarter of 2015; only 10% expressed concerned about deflation.

Concern about labor costs returned as the most pressing issue for 36% of respondents after being displaced by

raw materials costs (now 21%) in the second quarter. Concern about energy costs (11%) declined by 5 points in

the third quarter, while concern about interest rates (24%) increased 3 points over second quarter responses.

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Key Performance Indicators Outlooks for revenue and profits both improve slightly after falling from Q4 2014 highs

Expectations for increased revenues improved from 3.2% to 3.3% after falling from the high of 4.7 % we saw in

the fourth quarter of 2014. Expectations for profits also improved to 2.6%, up from 2.4% in the second quarter

of 2015.

Expectations for Revenue and Profits

While respondents’ expectations for higher input prices increased two tenths to 2.2%, the anticipated ability to

raise prices charged for their products and services over the next twelve months also increased two tenths to

1.6%, possibly reflecting the decline in concern about the inflationary impact of raw materials costs.

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

both the first and second quarter at 5.8%.

IT continues to be the strongest category of planned spending over the upcoming twelve months, but eased a

tenth from the second quarter 2015 projection to a 3.0% increase. Other capital spending plans increased a tenth

to a projected 2.5% increase, while anticipated spending for training fell 4 tenths to a 1.4% rate.

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Hiring Plans Concern about hiring plans returns

Slightly more than half of all companies (52%) continue to say they have the right number of employees which

is down slightly from 55% in the third quarter. The number of companies that say they have too many

employees dropped another point to 8% in the second quarter.

The number of companies that say they have too few employees but are hesitating to hire increased six points

from 14% to 20%, returning to the mark that we saw in the second quarter of 2014. The number of companies

with too few employees who are planning to hire also tapered off from 21% to 18%, which is lower than

readings seen over the course of the past year.

Staffing Relative to Needs

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Industry, Region and Business Size Outlook Optimism mixed across sector; expansion plans strengthen for small companies

After making a leap to 85% in the second quarter, retail trade optimism fell to 65% in the third quarter which is

consistent with 2014 levels. Wholesale trade also declined from 65% in the second quarter to 54% in the third

quarter. Construction maintained its 64% level of optimism, while manufacturing eased another two points in

the third quarter from 55% to 53% who remain optimistic about the prospects for their organization. Optimism

among technology executives recovered 7 points in the third quarter from 60% to 67%.

After falling off sharply in the second quarter to .7% the projection for expected headcount increase in

manufacturing recovered to 3.8%. Healthcare – other, which includes pharmaceuticals, device manufacturers,

etc. also improved from a 2.0% projection in the second quarter to 3.4%. Retail trade, which topped the list in

the second quarter, eased back to 2.6%, and construction also declined from 3.2% in the second quarter to a

projection of only 1.2% going forward from the third quarter of 2015.

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

banking sector deteriorated from positive rate of 1.5% in the second quarter to a projected decrease of 0.9%.

Mining and natural resources respondents are now projecting a 0.9% increase in headcount for the coming

twelve months, as compared with a 2.7% decrease in the second quarter.

Expected Employment Change by Industry

In terms of regional perspective, the West now leads in optimism, recovering from 57% to 63% optimistic in the

third quarter. Respondents in the Midwest and Northeast follow closely at 61% and 62%, respectively, while the

South remains soft, declining 2 points from 56% in the second quarter to 54%.

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

Companies with revenues < $10 million are showing more confidence, with those having expansion plans

increasing from 47% in the second quarter to 61% in the third quarter. The percentage of companies with

revenues > $1 billion also recovered 3 points in the third quarter, improving from 53% to 56%.

On the other side of the equation, the number of companies with expansion plans in the $10-$100 million range

eased from 66% to 62%, and plans for those in the $100 billion to $1 billion range also eased from 65% to 60%

in the third quarter.

Consistent with the second quarter, only 3% of companies overall expect to ‘contract a lot’, compared to 19% in

the first quarter of 2015.

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 and employee and benefits costs maintain the #1 and #2 slots in the third

quarter, while availability of skilled personnel moved up another slot to #3, trading places with domestic

economic conditions, which fell from #3 to #4.

Domestic competition maintained its #5 ranking, while domestic political leadership declined two slots from #7

to #9. Stagnant/declining markets, developing new products/services/ markets and changing customer

preferences followed in the #6, #7, and #8 slots

Materials, supplies and equipment costs fell out of the top ten in the third quarter. However, global economic

conditions reappeared for the first time since the third quarter of 2014, at the #10 spot

Top Challenges Facing Organizations

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Survey within the Survey Given some easing in the economy in the first several months of 2015, this quarter’s Survey within the Survey

followed up on questions asked in the fourth quarter 2014 about recruiting and employment.

Hiring and Turnover – The following table highlights responses to the question – In your recruiting efforts

during the past several months, what level of competition are you seeing for candidates as compared to the end

of 2014?

Competition for Recruits

Employee Turnover

In terms of employee turnover:

51% of respondents indicated that turnover has not been an issue for their company in 2015

39% indicated that turnover has continued to be a concern for their company, and

10% reported that turnover in their company has tapered off from 2014 levels.

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Survey within the Survey (cont’d)

Compensation and Benefits – The following table summarizes the responses to the question - What has the experience of your company in 2015 been in terms of compensation and benefit costs for hiring?

Costs of Hiring

Incentive Compensation – With respect to incentive compensation and bonus payments, respondents indicated

the following about their current projections for payments for 2015:

58% indicated they were on target with their initial projections, while

18% said their current projections were lower than their plans, and

11% are forecasting incentive compensation payments that will be higher than initially projected.

13% indicated that the incentive and bonus question was not applicable for their organization

Survey Background

The survey was conducted of AICPA Business & Industry members between August 4 and 24, 2015 and had

1440 qualified respondents. CFOs comprised 37% of the respondents, 20% were Controllers, 7% were CEOs or

Presidents, 7% were VPs, 2% were COOs; the remainder were Directors or other executives. Sixty-one percent

of respondents came from privately owned entities, 20% from publicly listed companies, 17% from not-for-

profits. Eighteen percent came from organizations with annual revenues of $1 billion or more, 24% from

organizations with $100 million to under $1 billion in annual revenues, 41% from organizations with $10

million to $100 million and 17% from organizations with under $10 million in revenues (numbers may add to

more than 100 due to rounding).

2%

11%

40%

47%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

WE HAVE BEEN ABLE TO REDUCE THE LEVELS COMPENSATION AND BENEFITS THAT WE HAD BEEN

OFFERING TO ATTRACT THE DESIRED CANDIDATES

N/A – WE HAVE NOT BEEN HIRING

WE HAVE FOUND IT NECESSARY TO INCREASE OUR COMPENSATION AND BENEFITS TO ATTRACT DESIRED

EMPLOYEES

WE HAVE MAINTAINED THE SAME LEVEL OF COMPENSATION AND BENEFITS OFFERED TO OUR NEW

HIRES