AICPA Business & Industry U.S. Economic Outlook Survey 3Q 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 01 The CPA Outlook Index (CPAOI) increased 1 point in the third quarter of 2016 to 69, continuing its recovery from a sharp decline in the first quarter. While optimism about the U.S. economy eased a point from 59 to 58 after rebounding significantly in the second quarter, optimism about the prospects for respondents’ own organizations remained constant. Expansion plans, profit expectations, employment and training and development spending all showed strength in the third quarter.

Component 3Q15 4Q15 1Q16 2Q16 3Q16 ∆Q to Q ∆Y to Y

U.S. Economic Optimism 67 64 47 59 58 01 09

Organization Optimism 73 70 63 68 68 00 05

Expansion Plans 72 70 63 69 72 03 00

Revenue 76 74 68 74 75 01 01

Profits 71 67 60 63 69 06 02

Employment 66 67 59 63 66 03 00

IT Spending 77 77 73 76 75 01 02

Other Capital Spending 72 72 67 70 71 01 01

Training & Development 69 68 67 67 70 03 01

Total CPAOI 71 69 63 68 69 01 02

CPA Outlook Index - 69

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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 relatively constant for economy and organizations, but expansion plans continue rebound The number of CPA executives who are optimistic about the U.S. economy increased a point from 37% to 38% in the third quarter after declining to 28% in the first quarter of 2016. The percentage of those pessimistic also increased a point from 21% to 22%. Organizational optimism, at 53%, remained constant with the second quarter. However, the percentage of companies with expansion plans improved further from 58% in the second quarter to 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 increasing to 23% in the second quarter, only 11% of respondents are now concerned about inflation. Conversely, 18% are now concerned about deflation, jumping from only 12% in the second quarter. Labor costs continue to be the most pressing concern for 55% of respondents. Raw material costs follow as the top concern for 18%. Interest rate concerns eased further as the top concern for 16% of respondents to only 14%. Energy cost concerns fell back to the 5% level seen in the first quarter of 2016.

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Key Performance Indicators Outlooks for improved profits recover Expectations for increased revenues eased a point to 2.9% after rebounding from 1.7% in the first quarter to 3.0% in the second quarter of 2016. However, expectations for profits in the coming year continued their rebound, improving to 2.3%, up from 1.5% in the second quarter after dropping to only 0.7% in the first quarter.

Expectations for Revenue and Profits

IT continues to be the strongest category of planned spending over the upcoming twelve months and recovered to 2.8% after falling to only 2.3% in the first quarter. Other capital spending plans also rebounded from 2.1% in the second quarter to 2.4% in the third quarter. Spending for training and development also improved three tenths to 1.6% up from 1.3% in the second quarter. Expectations for healthcare cost increases continue to be higher than other costs, and also ticked down to 5.6% after easing off from 5.7% in the previous quarter. The expected increase in “other input prices” dropped to 1.9% from the 2.1% level seen in the second quarter of 2016. Fortunately, the expected ability to increase “prices charged” also rebounded to 1.5% in the third quarter, after moving up to 1.3% in the second quarter.

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Hiring Plans Improved profitability and expansion plans also having positive impact on employment and spending In the third quarter, 48% of all companies now say they have the appropriate number of employees. Those saying they have an excess number of employees increased a point this quarter from 12% to 13%. More than a third (38%) indicate that they currently have two few employees. Of these, the percentage of companies that are planning to hire increased another two points from 19% in the second quarter to 21% in the third quarter, and the percentage of those who are reluctant to hire decreased from 18% in the second quarter to 17% in the third quarter.

Staffing Relative to Needs

Industry, Region and Business Size Outlook Optimism improves in most sectors; remains constant in manufacturing and construction Retail trade fell off from its recovery in 2016 with only 33% of respondents being optimistic in the third quarter. Retail hiring continues to be soft, but improved slightly to 1.1% from only 0.9% in the second quarter. Wholesale trade optimism also declined from 50% in the second quarter to 45%.

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Construction optimism improved to 69%, up from 59% in both the first and second quarters of 2016. However, the expected increase in construction headcount eased from 1.4% in the second quarter to 0.8% in the third quarter. Real Estate optimism remained constant at 62%. Manufacturing optimism eased a point to 47% in the third quarter. Hiring in the manufacturing sector remained constant, at a 1.2% expected increase for the coming twelve months Professional Services optimism declined slightly from 70% in the second quarter to 67% in the third quarter. Hiring in the professional services sector also eased a bit, but remains strong at 3%. Technology optimism and hiring also recovered. As of the third quarter, 71% of technology respondents are now optimistic. Technology hiring improved further from an expected increase of 2.3% in the second quarter to 4.4% in the third quarter for the coming twelve months. Finance and Insurance optimism eased a point to 57% in the third quarter, but hiring improved from 1.4% to 1.7%.

Expected Employment Change by Industry

Healthcare provider optimism continues to be strong with 68% now feeling positive about their prospects, after falling off to only 38% optimistic in the fourth quarter of 2015. However, healthcare-other respondent optimism fell off in the third quarter from 63% to only 50%. In terms of regional perspective, the West improved from 54% optimistic in the second quarter to 57% in the third quarter. The South gave back some second quarter gains, falling back from 53% in the second quarter to only 48% optimistic in the third quarter. The Northeast also gave back a good share of its second quarter gains, declining from 62% to 58%, while the Midwest held its ground, remaining constant at 53% optimistic.

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Industry, Region and Business Size Outlook (cont’d) Expansion plans were similarly mixed:

• The number of companies with revenues < $10 million having expansion plans eased to 53%, after recovering from 44% to 55% in the second quarter;

• Expansion plans for the $10-$100 million range of companies continued their rebound, increasing further to 65% in the third quarter

• The $100 million to <$1 billion range of companies, also eased two points declining from 61% of companies with expansion plans in the second quarter to 59% in the third quarter

• However, the percentage of companies with revenues > $1 billion having expansion plans rebounded significantly from 49% in the first quarter and 50% in the second, to 66% now saying they have expansion plans for the coming year

Expansion Plans by Business Size

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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 third quarter • Regulatory requirements and domestic economic conditions maintained their ranking at the top of the challenges

list • Availability of skilled personnel, domestic competition and employee and benefit costs also maintained their spots

in the top five • Stagnant/declining markets, followed by domestic political leadership also held their sixth and seventh place

rankings • Liquidity moved up a spot to eighth, switching places with developing new products/services/markets, which

gave up a spot, now ranking ninth • Financing/cost of capital returned to the number ten spot after falling out of the top ten last quarter

Top Challenges Facing Organizations

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Survey Background The survey was conducted of AICPA Business & Industry members between August 9-24, 2016 and had 452 qualified respondents. CFOs comprised 47% of the respondents, 23% were Controllers, 14% were CEOs or Presidents, 10% were VPs, 2% were COOs and 2% were CAOs; the remainder were Directors or other executives.

Seventy-seven percent of respondents came from privately owned entities, 10% from publicly listed companies, and 11% from not-for-profits. Seven percent came from organizations with annual revenues of $1 billion or more, 25% from organizations with $100 million to under $1 billion in annual revenues, 51% 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).