As 2018 draws to a close, it's clear that our earlier predictions about President Trump's effect on manufacturing M&A were right on target. Boosting domestic manufacturing has been a key policy focus for the Trump administration and the President is likely to build on his early successes. Removing excessive manufacturing regulations, addressing global trade imbalances, providing manufacturing reshoring incentives, reducing the corporate tax rate, and reducing unemployment by creating manufacturing jobs have been a boon to manufacturers in 2018.
These efforts outweigh the impact of modest interest rate increases on the manufacturing M&A outlook. Investor sentiment soared the day after the 2018 midterms and the Fed made no changes to monetary policy after the election, so the changes to the Congressional balance of power are unlikely to inhibit manufacturing growth.
The National Association for Manufacturing's (NAM) most recent quarterly outlook survey reports that the four-quarter average of a positive outlook is at an all-time high of over 93%. NAM expects the annual outlook for 2018 to be the highest in the 20-year history of the statistic. Survey respondents expect both sales and production to rise by about 5%.
Lifting Manufacturing Regulations Spurs Growth
Some of the President's earliest Executive Orders targeted reduction of the business regulatory burden that imposes more than twice the financial impact on manufacturing than on any other business sector. The cost of regulatory compliance has been particularly onerous for smaller businesses. He put administrative rules on hold and required the lifting of two existing regulations for every new regulation imposed. He also signed Congressional legislation that requires Congressional action for the re-promulgation of any regulation that had been previously lifted.
Regulations that are still on the books can still slow growth plans, so the President also directed agencies to expedite the review and approval of any permits required for the construction of new manufacturing facilities.
Tax Reform Impacts
The passage of the Tax Cuts and Jobs Act of 2017 has been a tremendous boon to manufacturing M&A. It reduced the corporate tax rate and lets businesses accelerate the write off the cost of investment in equipment. This has a favorable effect on manufacturing equipment modernization. Manufacturing capital equipment spending began to accelerate at the end of 2017, and The Institute for Supply Management’s semiannual forecast noted that capital spending jumped 10.1% in 2018.
The legislation's one-time tax break for repatriation of foreign income has helped to spur additional manufacturing reshoring, which has been on the rise for several years even without the tax break. It also provides buyers with additional capital, some of which will surely be added to their acquisition budgets. Large manufacturers who are looking to bring their production capability back home may leverage acquisitions as their best option for spinning up domestic operations.
The combination of corporate tax reform with the easing of manufacturing regulations resulted in an additional 396,000 manufacturing jobs in the first 21 months of Trump's presidency.
The increase in manufacturing jobs has been a boon to the overall employment numbers and impressive GDP growth in this first half of the Trump Administration. By mid-2018 the US saw the best 12-month manufacturing job creation numbers since 1995.
The Administration is working together with the private sector to foster more apprenticeships and training opportunities to help address the manufacturing labor shortage. By Executive Order, President Trump created the Council for the American Worker to oversee government job training programs and measure their effectiveness in preparing workers for jobs. The President's vision for immigration reform is designed to give opportunities to immigrants who can fill some of our labor shortages.
Global Trade Agreements
The President has never hidden his disdain for NAFTA, rightly claiming that it has been unfair to US manufacturers and workers. The USMCA agreement that Trump negotiated to replace NAFTA brightens prospects for US manufacturers. However, when he proposed increasing tariffs on Chinese imports, the news was met with a mixture of praise from some US manufacturers and concern from those manufacturers whose supply chains rely heavily on Chinese components. For this reason, the new check on Presidential power that will be provided when the new Democratic-controlled House is seated will help allay fears that Trump will move too far on this front. Both potential buyers and sellers in the manufacturing mergers & acquisitions arena need to keep a close eye on this issue.
Additional Interest Rate Hikes
The Fed has completed three of its four projected interest rate hikes for 2018 and plans to continue with three more hikes in 2019. Sellers need to take into consideration the effect of these rate hikes on buyer behavior - higher interest rates make it more costly to buy your business and they will hammer down valuations more aggressively. However, they still need to keep M&A in their corporate development plans, because organic growth also requires investment in labor, raw materials, and production capability. The Federal Open Market Commission (FOMC) foresees a slowdown in GDP growth in 2019 (2.8%) and 2020 (2.1%). Immediately after the 2018 midterm elections, the Fed issued a statement that did not change their gradual interest rate hike schedule or these growth rate predictions.
No Time Like the Present to Begin Your Exit Strategy
In conclusion, Positive Trends in Manufacturing should continue. Overall, we expect the Trump Administration to maintain and even build on their successes in improving the outlook for US Manufacturing with tax cuts, regulatory relief, and workforce training. The very real need to address the global trade imbalances and to return to a healthy economy that is not propped up by unnaturally low-interest rates may slow things down for manufacturing M&A as we move deeper into 2019. If the sale of your business is on your planning horizon, you need to begin taking concrete steps to implement your exit strategy now. You need a manufacturing business broker to help you take secure every advantage as a seller. To learn more, contact us today.