United States

The time is ripe for technology investment

Research shows many midsize companies yet to boost capex spending

THE REAL ECONOMY  | 

Fostering investment by businesses in productivity-enhancing areas such as software, computers, machinery and intellectual property was a primary consideration behind Congress’ 2017 tax overhaul, but RSM’s proprietary research shows that many middle market companies have yet to take the bait.

Data from the 2018 second-quarter RSM US Middle Market Business Index survey finds that while a plurality of midsize businesses are willing to increase their overall pace of investment in capital expenditures, the majority are not currently planning to increase the amount of their outlays over the next three years, despite the sharply lower 21 percent statutory corporate tax rate (down from a prior 35 percent) stipulated under the 2017 Tax Cuts and Jobs Act (TCJA).

Tech spending—on everything from cloud computing to improved automation and artificial intelligence—is particularly important now, as the economy moves through a period of profound disruption. 

Of middle market leaders expecting changes in tax law to improve their aftertax cash flows, 71 percent reported that increasing capital expenditures was a priority. Yet when all survey participants were asked about the TCJA’s impact on their capex plans over a three-year period, only 38 percent said they would boost outlays. This tracks closely with actual capital expenditure increases reported by middle market leaders in our top line index during the last 12 months, which have hovered between 40 to 45 percent.

MIDDLE MARKET INSIGHT: As challenging as it may be during a time of economic uncertainty, middle market businesses must find a way to allocate investment capital to keep pace with technological changes.

What is going on with the other 62 percent of middle market companies polled in the second quarter? Their reluctance to commit to capex outlays could be due, in part, to a lack of awareness on how certain provisions of the TCJA could benefit them through opportunities to get ahead in important areas such as investing in technology.

Embracing disruption

Technology investments may be beyond the reach of some businesses, either because they are too expensive, too unknown or too irrelevant. But tech investment is particularly important now as the country rides the tail end of an economic cycle marked by record unemployment; the U.S. unemployment rate, which in April dropped below 4 percent for the first time since 2000, is now 3.8 percent, and shows little sign of abating. In an environment where qualified labor is becoming scarcer and more expensive, now appears to be an ideal time to make technology investments.

Tech spending—on everything from cloud computing to improved automation and artificial intelligence—is particularly important now, as the economy moves through a period of profound disruption and disruptors (think gig economy players such as Uber and WeWork) have the ability to upend established markets.

The reticence over capital expenditures is not altogether surprising, however, considering that only 58 percent of executives polled in the second quarter said the new tax legislation will have a moderate or strong impact on their overall growth conditions, while slightly less (52 percent) expect the change to improve their after-tax cash flows.

To be sure, this reluctance to boost capex investment, in light of other macroeconomic forces at play, is one issue RSM will be watching closely.

Download The Real Economy Vol. 43

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