Middle market leaders have been slow to increase investments in capital expenditures despite incentives provided in the 2017 Tax Cuts and Jobs Act (TCJA), according to a recent report from RSM US LLP (“RSM”).
The RSM US Middle Market Business Index (MMBI) Capital Expenditures Special Report found that just 38 percent of middle market companies plan to increase the dollar volume of their capital expenditures over the next three years because of accelerated expensing and depreciation. Of that 38 percent, only half are planning to make new capital investments, while the other half are accelerating previously planned investments. This continues the trend of low levels of capital expenditures in the middle market since the inception of the index.
“The middle market’s reticence to invest in their business, despite the tax reform stimulus, may be due in part to a lack of understanding on how certain provisions of the Tax Cuts and Jobs Act, such as bonus depreciation, could benefit their companies and provide opportunities to accelerate capital expenditures,” said RSM US Chief Economist Joe Brusuelas. “The survey results also indicate business leaders plan to spend more on attracting and retaining talent, yet could channel some resources to technology to improve productivity.”
Spending Priorities Might Not Align with Opportunities
Despite the restrained approach to capital outlays, nine out of 10 middle market executives believe their level of capital investments expenditures is sufficient to meet current demand. This incongruity raises concern that this view may reflect growing complacency, particularly as the economy moves through a period of profound disruption.
“With gross domestic product increasing at an annual rate of 4.1 percent in the second quarter of 2018 and unemployment hovering around 3.9 percent, a forecast of increased capital investment would be understandable, if not entirely justifiable,” said Brusuelas.
Instead middle market executives express a range of priorities around the focus of their investments, including shoring up balance sheets, driving up investor returns, and increasing hiring and wages. An arguably more prudent investment in technology, however, may be the best approach to ensure long-term viability and combat an increasingly competitive marketplace.
Disruptive Technology and the Competitive Landscape
Considering today’s rapid pace of business transformation, technology innovations are becoming mainstream. Technologies once seen as unattainable, cost-prohibitive or fraught with risk such as the cloud and blockchain are transforming into fundamental mainstays for doing business and becoming more affordable for companies of all sizes. Middle market companies that maintain their status quo on IT spending risk quickly falling behind.
“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,” Brusuelas said.
The window of opportunity provided by the TCJA is open for a limited time, and middle market companies would do well to take advantage of the capital investment opportunities it provides. Even if technology is not a primary concern, it should be a part of any strategic business plan. Leading companies know it is no longer enough to simply maintain the technological status quo.
The survey data that informs the index reading was gathered between April 12 and April 30, 2018. To learn more about the middle market and the MMBI, visit the RSM website.
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