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Q2 2012 Middle Market Indicator finds steady, slowing growth

Published: 2012-07-25

Low economic confidence and persisting headwinds cause companies to hold more cash

The National Center for the Middle Market (NCMM) today announced that year-over-year revenue growth for the middle market has slowed from 6.9% to 6.1% according to findings unveiled today in the Q2 Middle Market Indicator (MMI), a quarterly look at the health and outlook of middle market companies in the United States. With companies in the middle market ($10M to $1B in revenues) accounting for over a third of private employment and 33% of GDP, they are a major indicator of the health of the US economy.

Q2 Highlights:

  • The middle market continues to lose confidence in the global and U.S. economies
  • Future investment to remain limited; businesses continue to hold cash in the face of uncertainty
  • Revenue growth seen but slowing
  • Employment growth is stable and projected to hold into next year
  • Challenges to middle market business performance persist

The NCMM is a partnership between The Ohio State University Fisher College of Business and GE Capital. The MMI is a quarterly survey of 1,000 CEOs, CFOs and other C-level executives from a geographically balanced sample of leading middle market companies in the United States. The survey examines the health and outlook of middle market businesses by analyzing capabilities, performance, growth drivers and overall economic outlook.

Conducted in June, the survey showed middle market companies expect revenue growth will slow from 5.2%* to 4.8% over the next twelve months. Companies projecting revenues to increase 10% or more in the next year dropped to 23% from the 28% reported in Q1. Despite this slowing growth sentiment, middle market businesses continue to outpace S&P 500 revenue projections, which were a reported 3.4% this quarter.

"The middle market is the bellwether for the U.S. economy. This quarter's indicator is showing that while the middle market continues to see revenue growth, hiring and job creation, it is becoming more conservative," said Dr. Anil Makhija, academic director of the National Center for the Middle Market. "Compared with last quarter's results, we are seeing some softening and a greater emphasis on building a stronger cash position. Still, middle market companies continue to demonstrate their ability to grow and outperform both large and small businesses despite headwinds and uncertainties related to government action and the global economy."

Middle Market expects stable hiring through the next year
Middle market companies this quarter reported increased year-over-year job growth at 2.0% versus 1.5% in Q1. Nine out of 10 middle market companies anticipate stable or increased hiring in the next 12 months, a positive payroll growth of 1.8%.

Confidence in the economy lowers
While middle market companies are projecting overall revenue growth in their companies, they expressed increased pessimism in the local, national and global economies. Only 5% of companies expressed confidence in the global economy's prospects compared with 7% in Q1, and 12% are confident in the U.S. economy compared with 15% in the previous quarter. Similar to Q1, companies are more confident closer to home with 23% expressing confidence in their local economies, though this still represents a decrease from the 28% reported in Q1. Further, the number of companies indicating "no confidence" in the global economy increased dramatically from 32% in Q1 to 44% in Q2.

Healthcare costs and new government actions continue to challenge the middle market
Similar to Q1, healthcare costs and new government actions were cited as "very" or "somewhat" challenging by a large majority of middle market companies. Overall, the issues middle market companies are most concerned with are regulatory:

  • The cost of healthcare (90% consider highly/very challenging versus 92% in Q1)
  • The cost of doing business (89% consider highly/very challenging versus 88% in Q1)
  • Uncertainty of how government actions will impact their business (85% consider highly/very challenging versus 81% in Q1)

"These results are not surprising in light of the ongoing debate about the cost of healthcare and how the Affordable Care Act will affect these employers" said Dr. Makhija.

Other notable challenges for middle market companies this quarter include the ability to pass on increased commodity costs (79% versus 75% in Q1) and corporate tax issues (65% versus 59% in Q1).

Executives more likely to hold cash
In light of these challenges, middle market leaders are more likely to hold an extra dollar as cash this quarter, with 50% of executives reporting they would hold an extra dollar rather than invest it back into their businesses, versus 41% in the first quarter.

incremental investment allocation graphic representation

Results by industry
Overall year-over-year revenue growth is most evident in construction, which increased to 6.5% from 1.6% in the previous quarter. Health care, comparatively, experienced a significant decline in revenue growth, dropping to 5.1% from 9.3% in Q1.

Industry Mean Total Revenue Growth (past 12 months) Employment Growth (past 12 months)
  Q2 '12 Q1 '12 Q2 '12 Q1 '12
Construction 6.5% 1.6% 1.1% 2.7%
Financial Services 7.5% 7.4% 3.6% 1.6%
Healthcare 5.1% 9.3% 1.9% 3.5%
Manufacturing 7.3% 9.8% 2.6% 3.4%
Wholesale Trade 5.1% 6.9% 0.7% 0.5%
Retail Trade 4.5% 7.9% -0.4% 1.7%
Services 8.5% 7.2% 4.8% 2.0%

Methodology
The MMI surveys more than 1,000 CEOs, CFOs, and other C-suite executives of America's middle market companies on their businesses, their capabilities and performance, their growth drivers and their overall economic outlook. The survey was designed to accurately reflect the 195,000 U.S. firms with revenues between $10MM and $1B, the upper and lower limits of middle market annual revenue.

The quarterly survey is conducted by an independent research firm, RTi, on behalf of the National Center for the Middle Market.

The MMI is published in the third week of the month following the quarter. Third quarter findings of the MMI will be unveiled at the second annual Leading from the Middle conference, a summit for middle market decision makers, taking place on October 24, 2012 at The Ohio State University.

*Revisions to the 1Q mean revenue and employment scores have been adjusted using the Winsorization Method to adjust outlier values in the distributions. The extreme values have been replaced by trimmed minimum and maximum values (representing the middle 95th percentile of each overall distribution within the survey instrument). In addition, the means have also been rebased so that they are reflective of the Middle Market as a whole and not solely the proportion

About the Middle Market Indicator
The Middle Market Indicator (MMI) is a quarterly survey of 1,000 CEOs, CFOs and other C-level executives from a geographically balanced sample of leading middle market companies in the United States. The survey examines the health and outlook of middle market businesses by analyzing capabilities, performance, growth drivers and overall economic outlook. The survey is conducted by independent research firm RTi on behalf of the National Center for the Middle Market located at The Ohio State University Fisher College of Business.

About the National Center for Middle Market Research
Founded in 2011 in partnership with GE Capital, and located at The Ohio State University Fisher College of Business, the National Center for the Middle Market is the leading source of knowledge, leadership and innovative research on the U.S. middle market economy. Through research, corporate outreach activities and student engagement, the NCMM is dedicated to promoting job creation and growth in the middle market as well as driving the dialogue on this vital economic segment.