Plans for tax savings taking shape
Trendsetter Barometer® business outlook: Q1 top findings
Privately-held companies are not done making the investments they believe are necessary to benefit from growth shifts in the US economy. A majority of CEOs and CFOs surveyed over the first quarter project their businesses will spend more and staff up over the next 12 months, according to PwC’s Trendsetter Barometer findings.
Panelists foresee higher revenue for their business compared with last year, although projections for average 12-month future growth have tempered to 7.3% after steadily rising over the past year to reach 7.8% in the fourth quarter. Notably, revenue gains look to be broad-based: 95% of panelists say they expect “positive” growth this year.
Economic sentiment continues to rise. A net 83% of panelists are optimistic about prospects for US economic growth over the next 12 months, up from 64% at this time last year.* As one panelist, a CFO with a general contracting firm, put it: “Geopolitical risks are the elephant in the room, but the economy is strong and if the infrastructure bill goes through, construction will boom.”
Lower business tax rates are broadly expected to provide an additional boost. Most (80%) expect they'll realize some benefit and panelists estimate an average tax savings of 5.16%. However, it appears that cash planning is at an early stage based on the executives surveyed.
Many executives said they are still assessing how they might deploy anticipated windfalls as well as the overall impact of the various provisions of the Tax Cut and Jobs Act. For example, while 26% are planning to use freed-up cash to reduce debt, another 26% are uncertain whether to do so. The CEO of a fuel wholesaler described the firm’s approach as “spreading the money around for now, looking to experiment and invest more money in employees.”
Those who are more firm in their plans offer an early indication that companies are seeking to balance investing in the business with raising returns for owners. Planned allocations are diverse, with employee pay, and investments in equipment upgrades and software among the notable beneficiaries. For example, of the 36% planning to increase capital spending, 72% say equipment upgrades will be a 'major new investment' and 54% say the same for software. The last time a tax change released a major amount of cash, in 2004, shareholders were believed to have received much of the benefit in share buybacks or fattened dividends. This time, these first intentions suggest cash distributions could be spread more widely. Yet with around third unsure whether to distribute more to owners/shareholders, this could also change.
A net 54% say their workforces will expand over the next 12 months, which is little changed since the fourth quarter. Outlooks for operational spending on business activities like sales promotions and information technology upgrades are likewise holding steady, with 85% saying they plan to increase expenditures.
These investments are being hammered out as concerns mount over labor supply, particularly for industrial workers. Half of the panelists now worry about a lack of qualified workers acting as a barrier to their business growth, the highest level of concern in over 10 years. These conditions are translating into outlooks for rising wages, but not at the pace panelists had anticipated in late 2017. Panelists are now projecting future increases in hourly wages for their current workforce at an average of 3.46%, down from a spike to 4.27% in the previous quarter. As privately-held company outlooks for wages have been a good predictor of annual growth in US employment costs overall, the recent fluctuations in the findings suggest wage trends are going to be harder for companies to get right. “We can’t increase wages because we will have to raise prices,” said the president of a home furnishings wholesaler that is struggling to cover skilled and unskilled positions, adding that the firm is “researching new technology to cover jobs we can’t fill.”
PwC’s Trendsetter Barometer is now in its 21st year. Panelists’ views have served as a good leading economic indicator on where US GDP growth is likely to be in a year’s time and whether employment numbers will rise or fall, our analysis of the data show. First quarter 2018 results reflect the views of 300 CEOs/CFOs interviewed between January 2 to March 20, representing a cross-sector profile of US privately-held firms with average annual enterprise revenue of $372 million.
*PwC calculates net economic sentiment as the balance of panelists who are “optimistic” minus those who are “pessimistic” about how they feel about the US economy over the next 12 months. We exclude “uncertain” responses.