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PwC: Private Companies Optimistic, Planning Capital Spending

July 31, 2015, 07:00 AM
Filed Under: Economy

The majority of private companies have voiced optimism about the U.S. economy for nine  consecutive quarters, with 70 percent currently expressing a positive outlook – up from 59 percent in 2Q 2014. This sustained level of confidence is resulting in more companies planning major investments, including new capital projects and hiring, reports PwC US’s latest Trendsetter Barometer®.

The quarterly report, which tracks the economic sentiments and business outlook of America’s leading privately held companies, shows this optimism being mirrored by private-company performance, with 34 percent reporting improved gross margins, the highest number in more than a decade. Roughly five out of six (87 percent) private companies expect their revenue to grow in the next 12 months, nosing back toward pre-recession levels.

Increased Spending and Cautious Expansion Into New markets Prevails

In the second quarter of this year, 36 percent of companies said they planned to spend on new capital projects in the next 12 months (up from 29% the prior quarter). Information technology is the top area where private companies plan to increase investment (31 percent), followed by marketing and sales promotion (22 percent). However, there is some growing concern among private-company leaders about higher interest rates (18 percent, up from 8 percent a year ago) and about a stronger dollar (19 percent, up from 8 percent a year ago). And with their current operating capacity at the highest level since 2007 (92 percent say they have reached at least three-quarters operating capacity), private companies’ appetite to spend may be curbed somewhat until greater capacity opens up.

Caution is also prevailing when it comes to expansion through acquisition and entering new markets abroad. Only 11 percent plan to buy another company in the next year – the lowest figure in 20 years (since Trendsetter Barometer began). Meanwhile, just 9 percent are contemplating joint ventures and 8 percent planning to expand into new markets outside the U.S. But sales abroad as a percentage of overall revenue for international marketers has held steady at approximately one-fifth of total sales (one-third for companies selling in emerging markets), with roughly one-quarter of companies also continuing to report an increase in international sales. And these international marketers are outspending their domestic-only peers across a variety of areas, including capital investments (42% of international companies vs 31% domestic-only) and increased spending on new products and services (26% vs 14%). Recent developments in Greece and China notwithstanding, international Trendsetter companies are clearly staying the course.

“While we’ve seen high post-recession optimism levels among private companies before, only in the past couple of years have those levels been sustainable. This is an encouraging indicator for a long-term U.S. economic revival, with the private sector and the American consumer firmly at its core,” says Ken Esch, a partner in PwC’s Private Company Services practice. “Despite increased optimism, it’s encouraging to see private companies making prudent business decisions about their capital plans. They’re investing more, but they are doing it carefully. While we saw a slowdown into new markets this past quarter, international expansion will remain a firm part of any long-term strategy.”

To read the full PwC report, click here.

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