The Great Recession ended in 2009 and, despite the growth that has prevailed in the decade since, many middle market business owners have been watching economic trends closely and taking steps to prepare for the time when growth stalls. While overall sentiment for the U.S. economy remains very positive, a recent KeyBank survey of 400 middle market business owners and executives on their expectations surrounding a potential economic downturn found that many believe a downturn is coming and are taking steps to prepare their businesses.
Is an economic downturn on the way?
Sixty-nine percent of middle market companies are expecting an economic downturn in the United States in the next two years. More expect it to come later as opposed to sooner, with 31 percent expecting a downturn in 2019 and 38 percent expecting it in 2020.
Not surprisingly, most middle market companies expect the next economic downturn to have a negative impact on their business. Only 20 percent anticipate no impact and another 20 percent think a downturn could positively impact their business.
Higher-revenue companies (those with annual revenue of $500 million to under $2 billion), as well as those in the Northeast (where there is a higher concentration of upper middle market companies), are more likely than others to expect a positive outcome. So, too, are those in the construction industry.
Despite the fact that 69 percent of middle market companies expect an economic downturn in the next two years, 48 percent of executives still have a very good or better economic outlook and 79 percent have a good or better outlook. Middle market businesses in the $500 million to $4 billion revenue range have a slightly more positive economic sentiment.
How do executives feel?
Interestingly, 79 percent of middle market business owners and executives remain optimistic about the outlook for their own company over the next 12 months. Considering 69 percent of companies are expecting an economic downturn no later than 2020, this high level of optimism may speak to the confidence companies have in the actions they have taken to safeguard against a downturn.
Nearly 70 percent are looking to expand the scope of their operations. Most want to do so through capital expenditures and by hiring more employees. Targeted capital expenditures include major equipment purchases, additional facilities/locations, and the expansion/renovation of current facilities.
Middle market companies are also seeking to expand through acquisitions, with 18 percent extremely likely to complete an acquisition in the next six months and 23 percent very likely to complete an acquisition in the next six months.
What are companies doing?
Given that 69 percent of middle market companies expect a downturn in the next two years, two-thirds are already taking steps to safeguard against it. Most commonly, businesses are looking to reduce expenses and improve operational efficiencies and productivity to counteract potential revenue losses. Some specific actions include employee and benefits reductions and alternate low-cost providers of raw materials.
Companies are also looking to identify new markets and products to offset decreased revenue from their current product and market mix.
Over a third of companies are conserving cash to increase liquidity, thus creating a buffer against a future economic downturn. They are also implementing new cash management solutions that accelerate the cash conversion cycle, improve efficiency, and also increase liquidity.
Higher revenue companies are more proactive about taking action to safeguard against an economic downturn. This level of preparation may partially explain their more positive outlook with respect to the next economic downturn. Construction companies are similarly positive. Their actions to drive efficiency are different, however, with a focus on employee reductions while higher revenue companies are focusing on reducing benefits.
Where we go from here?
Despite the fact that 69 percent of middle market companies expect an economic downturn in the next two years, business owners and executives still have a sense of optimism. Seventy-nine percent have a good or better economic outlook and 70 percent of middle market companies are expanding through hiring and capital expenditures.
Still, it’s best to hedge your bets. This business reality is reflected by the fact that two thirds of companies are taking steps, such as improving efficiency and increasing liquidity, to safeguard against a downturn. No matter what happens to the economy, U.S. companies will be better off because of the proactive steps they are taking now.
James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at 585-238-4121 or email at email@example.com