National Center for the Middle Market releases Q1 indicator
Revenue and employment growth in the U.S. middle market, representing nearly 200,000 American businesses across the nation, continues to outpace expectations and broader growth nationally. However, the threat of additional costs - specifically related to taxes, health care, and regulation - could lead to significant pullbacks in this sector, which includes companies like Krispy Kreme Doughnuts, Tootsie Roll Industries, Jamba Juice, K-Swiss, and Shutterfly.
According to the latest Middle Market Indicator (MMI), a survey of 1,000 middle market executives released today by the National Center for the Middle Market (NCMM), revenue and employment growth came in at 5.8 percent and 2.2 percent for 2012, respectively, outpacing executives' projections for the year. Further, two-thirds of middle market leaders expect their company's revenue to grow in the year ahead and more than one-third expect to add employees. The NCMM is a partnership between The Ohio State University's Fisher College of Business and GE Capital. The full survey results are available on the center's website.
Unique in its resilience and growth during the financial crisis and since the recovery began – the middle market has added 2.2 million jobs while larger companies shed more than three million over this time – the sector increasingly reports a willingness to maintain growth through additional investments in technology and innovation.
Executives also report, however, concerns that increased costs including those related to health care or tax increases could result in decreased investment, hiring freezes, and employee benefit reductions, according to those surveyed.
"We must not take the remarkable resilience of middle market growth for granted," said Dr. Anil Makhija, Director of the National Center for the Middle Market. "While the sector continues to outperform both its own expectations and national economic growth rates, the prospect of increased costs related to health care or tax increases could hold back this positive trend. It's surprising that, given the middle market's potential for significant growth, policy initiatives in Washington are rarely viewed through this sector's lens."
"The positive growth stories we hear from the middle market every day provide reason for optimism," said Mike Pilot, chief commercial officer, GE Capital. "These businesses are making investments in the people and technology that create new and sustained growth for the future. Yet the challenges they face are acute and merit our attention. This is why we partnered with Fisher to better understand and serve the needs of this segment."
An increased willingness to invest
According to survey results released today, 63 percent of middle market executives indicated their willingness to invest extra cash in technology and innovation, a significant increase compared to the survey's low point of 51 percent in the second quarter of 2012. In the latest survey, 37 percent of executives indicated their preference to hold extra cash at this time.
Concern over increased business costs and uncertainty endures
While middle market executives project continued growth and investment in the year ahead, they are concerned about the prospect of additional costs to doing business. Unclear about what to expect, they are ready to cut back to mitigate any increased costs. According to survey results, 89 percent identified the cost of doing business or uncertainty about government action as key challenges.
Concern over health care costs continues to top the list of challenges for middle market companies. More than half believe that the cost of health care will negatively affect their business. Since the start of the MMI, and on the heels of full implementation of the Patient Protection and Affordable Care Act (PPACA), at least 90 percent of respondents identified health care costs and uncertainty over health care regulation as a key challenge.
When it comes to the prospect of increased taxes resulting from further modifications to corporate or individual rates, just nine percent of respondents believed that increased taxes would not negatively affect their businesses.
Prepared to cut back
Should their concerns come to fruition, middle market executives are prepared to cut back on both hiring and investment. When asked which strategies they would employ to mitigate increased costs related to tax increases, 91 percent indicated they would impose a hiring freeze, decrease investment, or reduce employee benefits.
The MMI surveys 1,000 executives (CEOs, CFOs, and other C-Suite executives) from the middle market's nearly 200,000 companies, focusing on their business capabilities and performance, growth drivers, and economic outlook. The survey is weighted to accurately reflect the size and geographic distribution of this sector, which includes companies with revenues between $10 million and $1 billion.
The quarterly MMI tracks responses on the following topics:
• Gross revenues performance
• Overall company performance
• Employment performance
• Expected 12-month gross revenue and employment growth
• Confidence in the global economy, U.S. economy and local economy
• Key business challenges
• Top areas for investment dollars
• Perceptions on topical issues and challenges relevant to the U.S. middle market
The survey is conducted by the independent research firm RTi on behalf of the NCMM.
Background – the U.S. middle market:
The middle market, which represents one-third of non-government U.S. GDP and generates more than $9 trillion in combined revenues annually, is a source of 43 million jobs, accounting for nearly 34 percent of total U.S. employment. This sector is made up of nearly 200,000 businesses with revenue between $10 million and $1 billion. Between 2007 and 2010, U.S. middle market firms created 2.2 million jobs while businesses with revenues more than $1 billion showed cumulative job losses.
The middle market represents the fourth largest economy in the world, behind Japan and ahead of Germany, in terms of annual revenue.
The median age of a middle market business is 31 years, compared to 35 years for large companies and six years for small businesses.