Dive Brief:

• Three out of four audit partners expect that inflation will disrupt the economy for at least 12 more months, with 77% predicting their client companies will respond to the highest inflation in four decades by raising prices, according to a survey by the Center for Audit Quality (CAQ).
• More than three out of five (62%) audit partners see price pressures as the top risk for the economy, CAQ said, describing a survey of 700 audit partners. Roughly half of survey respondents identified labor shortages and supply chain disruptions as additional threats to stable economic growth.
• More than half (53%) of audit partners believe that attracting and retaining talented staff is a top priority for businesses this year and beyond, with growth, cost management and financial performance ranked as lesser priorities, CAQ said.

Dive Insight:

Tight labor markets have bedeviled business planning by CFOs across most industries since the start of COVID-19 lockdowns more than two years ago.

The number of unemployed people looking for work has failed to keep up with demand for workers, with job openings roughly twice the number of job seekers during several months through June, the Labor Department reported Friday.

Employers expanded payrolls by 372,000 in June and hired an average of nearly 400,000 workers each month during the second quarter, the Labor Department said. The 3.6% unemployment rate in June is slightly above the 50-year low recorded prior to the start of the pandemic in early 2020.

Facing challenges from the labor market, inflation and supply chain bottlenecks, only 16% of audit partners voiced optimism about prospects for the economy during the next 12 months, CAQ said.

Many economists in recent weeks have reduced their estimates for economic growth, noting a decline in manufacturing production, a slowdown in housing construction and reduced consumer spending.

“The risk of a recession during the next 24 months is about even given the various challenges to the U.S. and global economy,” Sophia Koropeckyj, managing director at Moody’s Analytics, said Friday.

Concern among audit partners about the threat to client companies from inflation is widespread, ranging across the top six industries and all categories of market capitalization, CAQ said.

“Many businesses initially absorbed increased costs to produce and deliver their goods and services,” CAQ said. The survey revealed, however, that 95% of audit partners focused on consumer products companies and 94% involved with industrial products businesses expect price increases.

The Federal Reserve, concerned that price increases will snowball across the economy, is engaged in its most aggressive monetary policy tightening since 1994.

Fed officials last month raised the main interest rate by 75 basis points and supported an additional increase of either 50 or 75 basis points at their next gathering July 26-27, according to minutes of their meeting released Wednesday. A basis point is one hundredth of a percentage point.

CAQ surveyed 700 audit partners from May 14 until May 27 from firms that audit U.S.-listed companies with nearly $50 trillion in market capitalization.