US MNCs have a positive outlook for the domestic economy but faced with an old expansion and a China trade spat, they’re wary.
The vast majority of US businesses have a positive outlook for the domestic economy, but understanding that it is in its 10th year of expansion, sizable percentages of them are taking actions to prepare for a downturn, according to a recent survey of corporate finance executives by TD Bank.
Stephen Foley, head of corporate banking at TD, noted that the vast majority (85%) of the 300 respondents had excellent or good outlooks for the US economy, and 83% believe the economy will be strong in the future as well. An even greater percentage, 94%, described their business’s health as excellent or good, and 61% saw no change in the future.
Nevertheless, the US economy has been chugging along nicely for a record length of time, and given the inevitability of a downturn, significant percentages of respondents said they are preparing for that by:
- Developing investment strategies (49%).
- Cutting back expenses (39%).
- Working on reducing debt levels (34%).
- Monitoring cash flow (34%).
Mr. Foley noted that companies have been focused on growth, and with a downturn looming they’re reconsidering ways to continue that growth, including acquisitions, cutting expenses and buying back shares. A company that’s been buying back $300 million in stock annually, for example, may want to reconsider whether the market still attaches the same value to those repurchases, or if pursuing acquisitions could result in higher risks when the economy sours.
“They’re analyzing all sorts of items and agendas on the docket, to make sure they’re prepared for heading into a downturn,” Mr. Foley said.
Economy slowing despite optimism. Respondents’ high level of optimism could mean they foresee a downturn still far off or perhaps a mild one. Mr. Foley said that’s the question the Federal Reserve Board is wrestling with now. Nevertheless, “if you peel back the onion and look at the numbers more closely,” he said, a slowdown in manufacturing is beginning to emerge, and global growth appears to be slowing.
“Our chief economist is calling for three cuts this year and three cuts next year,” Mr. Foley said.
Get liquidity in place. Mr. Foley noted that trimming expenses has been an ongoing effort. In terms of debt levels and cash flow, he said, TD has recommended that clients with outstanding debt remaining on their balance sheets take advantage of today’s still low rates to extend tenors on commercial debt and take advantage of rallies in 10-year treasuries—the rate recently fell below 2%—to issue bonds.
Given companies’ focus on growth, Mr. Foley said, an interesting survey finding was that the primary source of funding for capital spending was equity financing, given it has long been considered the most costly type of capital and the cost of debt today is historically low.
“Some of that may be that valuations have risen so high, if a company is considering an acquisition, it has another currency available in the form of its stock,” Mr. Foley said