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Is the current economic cycle coming to an end for middle market companies? To find out, KeyBank surveyed 400 middle market business owners and executives* on their expectations surrounding a potential economic downturn and the implications for their businesses.

Is an economic downturn on the way?

Nearly 70% of middle market companies are expecting an economic downturn in the U.S. Of those, approximately 30% expect the downturn to take place in 2019 while approximately 40% expect it in 2020.

Not surprisingly, the majority of middle market companies expect the next economic downturn to have a negative impact on their business. About 20% do not anticipate any type of impact, while another 20% 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.

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Economic downturn impact expectations


58% - Negative Impact

22% - No Impact

20% - Positive Impact

What are middle market companies doing to prepare for an economic downturn?

Given that most middle market companies expect a downturn to hit soon, two-thirds are already taking steps to safeguard against it. Most commonly, businesses are looking to reduce expenses and improve their operational efficiencies and productivity in an effort to counteract potential revenue losses. They are also looking to identify new markets and products to offset decreased revenue from their current product and market mix.

Increased operational efficiency measures are a major focus perhaps because of the perceived threat of an economic downturn, but they will help regardless of what happens with the economy.


“Most middle market firms’ accounts receivable and accounts payable systems are still paper-driven processes, which is inefficient—moving to next generation capabilities with automation and digital flows will increase efficiency and productivity.”

- Kenneth Gavrity, EVP-Group Head Enterprise Payments at KeyBank


“The value of companies automating their cash management cycle also includes providing them with more comprehensive and timely data and visibility into how they can run their business more effectively, which can be particularly helpful when they have multiple systems or subsidiary companies.”

- Brandon Nowac, Group Head Commercial Bank Payments at KeyBank


Beyond efforts to enhance operational efficiencies and identify new markets, over a third of middle market companies are increasing liquidity, as well as searching for alternate lower-cost suppliers of raw materials. Higher-revenue companies are more likely to be taking action right now; this level of preparation might partially explain their more positive outlook with respect to the impact of the next economic downturn. This also holds true for construction companies, although they are more likely than others to be implementing employee reductions as a protective measure, while higher-revenue companies are more likely to be considering a reduction in employee benefits.

Steps taken to safeguard against downturn

  • Improve Operational Efficiencies & Productivity
  • Identify New Markets
  • Increase Liquidity
  • Employee & Benefit Reductions
67% Taking Steps to Safeguard Against Downturn

How do middle market executives feel about their own businesses?

Interestingly, approximately 80% of middle market business owners and executives remain optimistic about the outlook for their own company over the next 12 months. Considering 70% of companies are expecting an economic downturn by 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.

While companies’ expansion plans have remained fairly steady overall, the decrease in recent acquisitions, as well as reduced interest in funding expansion plans and acquisitions using cash reserves, suggest companies are cautious with respect to an impending downturn. In addition, higher-revenue companies, in particular, have been more active in moving their cash reserves into alternative investment vehicles to help increase returns on these funds.


“Improving the efficiency of their accounts receivable cycle times can also potentially help companies improve their cash reserves, providing them with greater flexibility in how these funds are used or invested.”

- Brandon Nowac, Group Head Commercial Bank Payments at KeyBank

Overall sentiment for the U.S. economy remains very positive. Despite a decline in the number of middle market companies expressing an excellent outlook, over 60% still have at least a very good outlook.

Middle market businesses in the $500 million - $4 billion revenue range have an even slightly more positive overall sentiment.

The outlook for individual companies is also still positive – especially in the western United States – and nearly 70% of companies are still looking to expand the scope of their operations, as they were in the early summer.

Most want to do so through capital expenditures and by hiring more employees. Major equipment purchases, additional facilities/ locations, and the expansion/ renovation of current facilities are also very much in play.

Acquisitions remain a favored route for middle market companies, with nearly half indicating a strong likelihood to complete one in the next six months.

KeyBank can help your company gain efficiency and data visibility.

In an age where digitizing and data visibility are paramount, KeyBank has several solutions to help companies achieve growth and efficiency goals. No matter what your objectives, KeyBank makes it a point to understand your business, your industry, and your goals to bring value-added strategic ideas, insight and capital to help your business grow.

Let’s talk about your business.

For more information on KeyBank’s automation capabilities and digital solutions, contact a regional executive.

Disclosures

"KeyBank Middle Market Business Sentiment Survey” December 2018.

*

Business Owners/Executives—This sample group represents the opinions of respondents who are specifically business owners, C-suite professionals, or have the title of SVP, VP, controller or treasurer ($10M to under $2B revenues).

This document is designed to provide general information only and is not comprehensive nor is it legal advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. KeyBank does not make any warranties regarding the results obtained from the use of this information.

KeyBank is Member FDIC.

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