SMB Optimism, Expectations for Profitability Rise Despite Lingering Economic Concerns

According to Umpqua Bank’s recently released annual business barometer, while concerns about the direction of the U.S. economy persist, business optimism is rising and expectations for revenue and profitability are increasing. The study also found a growing appetite among businesses to make prudent investments that will help them become more efficient and competitive.

"Small and middle-market businesses across the country continue to show why they are the backbone of the U.S. economy," Tory Nixon, president of commercial banking at Umpqua Bank, said. "While economic concerns linger, they're responding to the uncertainty with growing optimism and confidence in their ability to adapt and move forward. Businesses are planning strategic moves they believe will help them become more efficient, more profitable and ready for what's ahead."

With positivity about the current state of the economy (41% of respondents rated it excellent/good) and expectations for increased revenue (58%) and profitability (51%) hovering around or exceeding five-year highs, businesses are noticeably more likely than last year to take planned action to achieve their goals in the next 12 months. This is especially true of middle-market businesses, which are more likely to invest in digitization for efficiency (87%) and tools to protect payments systems (74%), make significant changes to products and services (65%), expand their commercial real estate footprint (57%), finance expansion (49%), or acquire another business (40%).

Although businesses are cautiously more optimistic about the economy than in 2022, a majority believe an economic downturn is more likely now than they did at the beginning of the year. In order, all businesses surveyed rated inflation, a potential recession, and high interest rates as their top three concerns.

Key Investments Target Efficiency over Aggressive Growth

According to the report, businesses are focused on becoming more efficient in the year ahead. Outside of increasing revenue and sales, improving operational efficiency ranked as the most "crucial" factor to success. Nearly three in four enterprises plan to invest in digitizing new areas of their business to improve efficiency. Middle-market companies are especially focused on increasing efficiencies through automation, which ranked as the "most important" action to manage profitability in the next 12 months, as well as a top investment priority.

The majority of those surveyed, including 65% of middle-market businesses, are likely to make significant changes to products and services this year, with the goal of increasing profitability as a key motivator. To protect working capital, 60% of businesses are also likely to invest in financial tools to protect their payments systems, including 74% of middle-market companies.

"Leaders are less focused on wholesale changes to their business right now and more focused on shoring up their fundamentals," Richard Cabrera, head of middle-market banking at Umpqua Bank, said. "Those enterprises with a sound business model, lean and efficient operations, and strong financial management will be well-positioned over the next 12-18 months for continued success and future growth."

Businesses in the West More Optimistic Than Other Region

Business in the western part of the U.S., which has closer geographic ties to Asia, a vast agriculture industry, and a significant technology hub, recorded significantly higher marks of optimism than other regions in the report. This year, 57% of business respondents based in the West rated the economic conditions in the U.S. as either excellent or good compared to 33% in the Midwest, 39% in the South and 36% in the Northeast. When asked whether they anticipate that overall economic conditions in the U.S. will improve in the next 12 months, 46% of businesses in the West believe economic conditions will improve, while 33% in the Midwest, 39% in the South and 34% in the Northeast believe so.

The higher level of optimism among businesses in the western U.S. is underscored by the fact that 42% of businesses in the West say they are likely to hire and increase staffing levels in the next 12 months. This compares to 33% of businesses in the Midwest, 39% of businesses in the South and 36% of businesses in the Northeast.

Cybersecurity Now Top Non-Macroeconomic Concern

Of those surveyed, 22% of middle-market leaders said addressing cybersecurity is crucial to their success in the next year. Overall, leaders also ranked cybersecurity as the top concern after inflation and a recession, ahead of talent acquisition and retention this year. In the past 12 months, 21% of middle-market businesses surveyed indicated they have been the target of cyber-related fraud and ransomware attacks.

Supply Chain Boomerang

Close to half of middle-market businesses (49%) surveyed have brought supply chains or manufacturing back to the U.S. in the past 12 months. Another 57% indicated they will likely continue that trend in the year ahead. When asked why, the top three reasons were that doing so was more profitable (21%), provided increased control (11%) and was the best opportunity to grow business (11%).

Commercial Real Estate Holds Steady

The appetite for expanding commercial real estate is holding steady, according to the report. Middle-market companies are more likely than last year to consider expanding their real estate footprints in the next 12 months (2023: 57% and 2022: 39%). Among small business owners, 35% indicated they are likely to invest in expanding their real estate footprints.

Businesses Plan to Continue Hybrid Options for Workers

For industries not constrained by in-person services, hybrid schedules remain the norm. More than half of all businesses surveyed offer consistent hybrid work options for employees, including one in three allowing remote days most of the week, and one in five allowing a full five remote workdays. While a solid majority (55%) plan to maintain their current approach over the next year, 22% actually plan to expand remote work options, including 28% of middle-market businesses, compared to 17% planning to scale back.