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Middle Market Business Sentiment Report - October 2017

by KeyBank Commercial Bank 10.17.2017

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Introduction

Each quarter, KeyBank surveys owners and executives of Middle Market businesses* — those in the $20 million to $4 billion range — to gain insights into selected topics and find out how they feel about their companies in light of leading economic indicators, as well as the current political and business climates. This month, we look at proposed corporate tax reform, ongoing regulatory changes, and how executives are feeling about their personal finances.

Likelihood of tax reform and the anticipated rate
Likelihood of tax reform and the anticipated rate

70% think it’s somewhat, very or extremely likely that the federal corporate tax legislation will pass by the end of the year.

73% think the new corporate tax rate will be 20-30%

  • <15%
  • 15%
  • 20% - 22%
  • 25% - 30%
  • 30% - 21%
  • 35%
  • 35% +
Economic snapshot versus June 2017
Economic snapshot versus June 2017

U.S. economic outlook – September 2017

  • Excellent – 15%
  • Very good – 32%
  • Good – 36%
  • Fair – 14%
  • Poor – 3%

Consistent with last quarter, 83% of companies are optimistic about the economy. See how Bruce McCain, Chief Investment Strategist for Key Private Bank, views the latest indicators.


Expansion considerations – September 2017

  • Plan to expand – 68%
  • No expansion plans – 32%

A majority of companies are still planning to expand their businesses. The most cited method is expanding or renovating current facilities, up to 52% vs. 43% in June.


Likelihood to complete an acquisition (next 6 months) –September 2017
  • Extremely likely – 23%
  • Very likely – 22%
  • Somewhat likely – 24%
  • Very unlikely – 16%
  • Extremely unlikely – 15%

Approximately 70% of companies are likely to consider an acquisition in the next six months. For those not considering an acquisition, a lack of strategic targets and excess capacity are still the biggest factors.

See how Bruce McCain, Chief Investment Strategist for Key Private Bank, views the economy.

Middle market shows optimism about federal tax reform.

The current administration has been vocal about its desire for substantial corporate tax reform, and that possibility seems to be taking hold with respondents in this survey. Seventy percent of those asked believe that corporate tax reform is somewhat, very or extremely likely before the end of 2017. A subset of business leaders are even more optimistic, with 46% of companies in the $250 million to $500 million range saying reform is extremely or very likely by year’s end.

Almost all of our audience expects the rate to drop from the current 35%. In fact, 73% of those surveyed predict it will fall to somewhere between 20 and 30%. After our respondents shared their views, the administration's proposed plan was released with a 20% corporate tax rate, just as 22% of those surveyed predicted. According to the Congressional Budget Office, the current U.S. top federal statutory corporate income tax rate of 35% is among the highest in the world. Experts are split over the impact of a possible reduction, with some saying it will lead to more jobs and economic growth while others claim it will only increase the deficit. The debate is far from over.

Regulatory changes are having a positive impact on middle market businesses.

Running a business is a complex, time-consuming task, so it’s not surprising that business owners and executives get excited about the prospect of a simplified legal and regulatory environment. This quarter’s survey found that 54% of respondents think the current administration’s regulatory changes have had a positive effect on their business. That sentiment is even stronger among a subsection of middle market businesses, where 71% of respondents in the $250 million to $500 million range feel the changes have had a positive impact. This result may reflect the fact that owners and executives in these businesses don’t have as much staff support to deal with the regulatory obligations.

A quarter of those surveyed who view the regulatory changes as positive cite the general reduction of business regulations as the reason. In fact, according to U.S. News & World Report, federal agencies expect to complete 1,732 regulations this year and in its first five months, the Trump administration has withdrawn or delayed 860 proposed regulations. When asked which regulation reductions have been most beneficial, respondents cited examples such as the repeal of Dodd-Frank, fewer EPA regulations, changes in NAFTA, lower taxes and more focus on energy expansion.

Impact of regulation changes on businesses

Impact of regulation changes on businesses

  • Very negative – 3%
  • Somewhat negative – 7%
  • Neutral/no change – 36%
  • Somewhat positive – 31%
  • Very positive – 23%

54% positive.

Business owners and executives are feeling good about their personal finances.

In this survey we also asked middle market business owners and executives how they feel about their own personal financial situation over the next 12 months. The general sentiment is overwhelmingly positive, with all but 6% rating their feelings as good, very good or excellent. This optimism could be due to the continued rise of the stock market through the third quarter combined with the repeated promises of the new administration for accelerated economic growth, but whatever the underlying reasons, respondents are clearly feeling optimistic.

Despite this positive sentiment, it's important for business owners to ensure they have an appropriate personal financial strategy in place. Working with a financial planner to address and monitor objectives at least annually will help to navigate the ever-changing environment and to course-correct as situations and opportunities arise. For example, a recent article in Forbes by Bruce McCain, Chief Investment Strategist for Key Private Bank, shows how investors can trade smarter to reduce taxes.

What does this changing landscape mean for businesses and individuals?

The current administration is pushing for a business-friendly environment, and there is no question that we are in a time of extreme uncertainty. Despite all this change, business owners and executives maintain an optimistic outlook for themselves, the economy, and their companies.

Middle market businesses must continue to make smart investments and look for opportunities to expand or grow while ensuring their operations are as efficient as possible. Looking toward more reductions in regulations or potential tax cuts, businesses should be thinking about smart ways to invest those savings in personnel, equipment, facilities or infrastructure. Similarly, individuals should plan for their financial future with robust wealth management and tax strategies that can adapt in this fluctuating environment.

Whatever happens, you need a plan.

There are many proposed changes on the table in Washington right now, with great uncertainty around their future timing or impact. Business owners and executives can prepare by anticipating cash flow and liquidity needs and having internal investment policies and tax strategies ready to go. KeyBank can help you take advantage of excess cash and rising interest rates with investment guidance, cash flow needs analysis and more.

Let’s talk about your business.

For more information on KeyBank’s Commercial Bank services, contact a regional executive.


Northeast Ohio/Western PA

Kip Clarke
216-689-4201
kip_clarke@keybank.com

Eastern NY & PA, CT, MA

Peter Cosgrove
518-591-4044
peter_cosgrove@keybank.com

 

Pacific

Carol Nelson
206-684-6200
carol_k_nelson@keybank.com

Rocky Mountains

Tom Tulodzieski
720-904-4456
ttulodzieski@keybank.com

 

Upstate New York

Gary Quenneville
716-847-7861
gary_quenneville@keybank.com

Great Lakes

Skip Watson
317-464-8159
skip_watson@keybank.com

 

New England

Sterling Kozlowski
207-874-7298
sterling_kozlowski@keybank.com

 


*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 ($20M to $4B revenues).

The information and recommendations contained here have been compiled from sources believed to be reliable and represent the best current opinion on the subject. No warranty, express or implied by KeyBank, is made as to the absolute correctness or sufficiency of the information contained. This is meant as general information only; particular situations may require additional actions. ©2017 KeyCorp. KeyBank is Member FDIC.

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