As we approach the new year, most U.S. middle market companies are feeling optimistic about 2019, likely leading to business investments, higher wages, innovation and interest in merger and acquisition (M&A) opportunities.
According to TD Bank’s 2018 Middle Market Survey of 350 companies with annual revenues from $50 to $500 million, in 2018 U.S. middle market companies anticipated growth and a windfall from tax reform. Nearly all (94 percent) of these businesses expected some amount of revenue growth in 2018, with the largest portion (33 percent) projecting a 6-10 percent increase, even as they faced some domestic and global headwinds.
Tax reform, interest rates boost capital
In TD's survey, 71 percent of companies said tax reform will positively impact their business, with those with $300 million and higher in annual revenue most likely to reap benefits. This upbeat outlook is not unfounded given that the new law cuts the federal corporate income tax rate and repeals corporate alternative minimum tax, freeing up capital and creating deeper cash reserves. Middle market firms across all industries have pre-emptively been using these savings to:
- invest plants and equipment (31 percent)
- upgrade or add technology (34 percent)
- increase employee wages and bonuses (35 and 32 percent, respectively).
The view of interest rate increases is more mixed. While half of all middle market companies surveyed feel higher interest rates will have a positive effect on their business, 46 percent of organizations with $50 to $99 million in annual revenue stated that rate hikes will have a negative impact. These companies will no doubt keep a closer eye on the Federal Reserve's actions going into 2019 as they make their financial plans for the next 12 months.
Though many mid-sized businesses are optimistic, they identified some challenges to their operations, including domestic competition (41 percent), global competition (32 percent) and new trade policies (24 percent) among the top issues.
Middle market executives are also keenly watching the tight labor market, a trend noted in the recent Beige Book. Although companies now have capital for expansion and want to grow staff, they are having trouble filling both skilled and unskilled positions due to a persistently low unemployment rate.
Overall, middle market organizations feel confident about their prospects heading into 2019. As executives evaluate their growth plans, banks will continue to play a crucial role by providing financing and guidance as trusted advisors to help them succeed.
For more, please see the full results of TD Bank’s 2018 Middle Market Survey.