After several years of sluggish economic growth, executives at midsize private companies are feeling more confident about their businesses’ growth prospects and are anticipating a major boost to the U.S. economy this year, according to a new survey.
For its report, “Breaking the Cycle,” Deloitte surveyed mid-market and private company executives for the sixth consecutive year. According to the report, 63 percent of executives surveyed after the November election indicated they are “very” or “extremely” confident that the U.S. economy will improve over the next two years, nearly twice the percentage from last year.
“Our previous reports came out in the midst of one of the slowest recoveries we’ve had since World War II,” said Deloitte vice chairman and national managing partner Roger Nanney. “In this survey we saw big jumps in confidence in terms of the future of our U.S. economy. Four in 10 of the executives surveyed expect GDP to grow at a rate of 3 percent or more. That optimism moved over as well to a strong level of optimism around their own individual companies’ prospects. Nine in 10 of the respondents are confident of their own success in the next 24 months. That’s up from about 79 percent last year, and 34 percent of these executives see their own revenue growth being at or above 26 percent.”
Despite the optimism, 70 percent of executives surveyed also cited uncertainty. Even though the promise of lower taxes, increased infrastructure spending and a rollback of the health care law by the Trump administration may lift business confidence, mid-market companies will need to be prepared as many of these policies remain in flux.
“While the big headline was a nice increase in optimism about the prospects for the economy and business, there was an equally high jump in levels of economic uncertainty,” said Nanney. “Many of the respondents said they were uncertain about the economy going forward. It’s a bit of a dichotomy, but the way I interpret that is they’re seeing the bright side of the big picture, with indications there are a lot of plans to address policy issues that are close to the hearts of these business people. But at the same time, the devil’s in the details of how things work out.”
Executives are keeping an eye out for tax reform. “In areas like tax I think we see lots of movement around potential changes in the tax code, talking about reduction in taxes and tightening up around the international tax framework that we operate under,” said Nanney. “I think today there is enough information out there to begin to do scenario planning so you can be prepared in case things change.”
M&A expectations are on the rise, with more than half of the companies surveyed indicating they plan to pursue M&A as an acquirer this year.
“There continues to be pretty fertile ground out there for M&A activity,” said Nanney. “I think a little over 40 percent of these companies have done acquisitions in the last year and plan to continue to do that into 2017. We also saw a jump up to 28 percent of the respondents had an indication they would be entertaining initial public offerings in the coming year, which is different from past surveys. Normally these companies generally have an intention to stay private and access more private financing sources. But it could mean we see an improving IPO market in 2017.”
He pointed to the cash sitting on many companies’ balance sheets. “Private equity firms and companies are in a good position to invest in organic types of growth through acquisitions and new product creation,” said Nanney. “Companies now are not only looking at opportunities to acquire businesses within their own sector, but they’re looking at technology companies as a way to take advantage of technologies that can significantly change their competitive standing within their sectors. I do think it’s an important time to be focused on your strategies and watch how these policies play out because it can mean real opportunity for those companies who are ready to implement their strategies and make investments at the right time.”
The top three obstacles to company growth cited by the business leaders are increased regulatory compliance (33 percent), keeping up with the pace of technology (33 percent), and rising health care costs (32 percent). They see skills shortages as a growing concern, increasing by 10 percentage points from last year as a hurdle to economic and business growth.
When asked which government measures would help their businesses grow the most over the next 12 months, the No. 1 response was reducing corporate tax rates. Keeping interest rates low, rolling back health care costs, and supporting infrastructure needs all tied for the next most important government measure that could help.
Technology again topped the list as the key investment priority over the next 12 months. Business leaders are especially keen on focusing their tech investments on cloud computing (42 percent), data analytics (40 percent) and customer relationship management (34 percent). They indicated the biggest potential returns from tech investments like these may be business process improvement, employee productivity and customer engagement.
“When you look at where companies are going to be investing, there continue to be really high indications of continued investments in technology,” said Nanney. “The whole transformation of the way businesses think about technology has moved from the IT department to the boardroom. And it’s important to really think about the impact on your business and how you can improve productivity, and engage with customers and your people through the use of emerging technologies.”
Deloitte recently released a separate report on emerging technology trends.
Employee development and training also continue to be important investments, as 72 percent of the survey respondents indicated they have difficulty finding new employees with the right skills and education. For that reason, training (47 percent), increasing full-time employees (44 percent), and increasing compensation (33 percent) were cited as the top investments in talent over the next 12 months.
“The whole area of talent continues to be an important focus area of these companies,” said Nanney. “Investments in training continue to be at the top of their list. There’s still a skills gap out there, and the ability to hire people with the right skills, so they’re investing in training. They’re also beginning to hire more people outside the U.S. There’s a little bit of a tug of war in the survey between those who would like to see trade policies and trade agreements tightened up, and others who would like to see them loosened. Regardless of where you stand on that, these companies are continuing to expand globally and they’re continuing to hire people globally.”
The survey pointed to the importance of the global economy as U.S. mid-market companies are increasingly looking abroad to expand operations, improve their productivity, and develop new products and services.
More than half of the companies surveyed expect to increase the revenues they generate outside the U.S., with 29 percent forecasting revenue increases between 26 and 40 percent over the next 12 months. Canada, Western Europe and the Asia Pacific region are expected to be the top three contributing markets. In addition, nearly 60 percent of the companies in the survey expect to have 11 percent or more of their workforce outside the U.S., compared to 42 percent currently.
“In high tech and even across other sectors, we saw these companies plan to increase their hiring in 2017 and compensation will be increasing,” said Nanney. “I think the smart thing for people to begin to make a part of their planning is dealing with their talent strategies and how they create a culture that helps them to retain their people as well as invest in those who are joining.”