Middle Market: The Not-So-Little Engine That Could
Middle market companies are a major growth engine for the U.S. economy
Middle market companies are a major growth engine for the U.S. economy
Mid-sized businesses account for one-third of employment in the U.S. and one-third of the country’s gross domestic product (GDP). Yet investors, the media and Capitol Hill all too often focus on small startup companies and behemoth multinational companies. In between, according to the Association for Corporate Growth’s 2014 Middle-Market Policy Agenda, there are middle market companies that employ more than 43 million employees that are driving economic recovery from the recession.
Like the U.S. economy, mid-market companies are recovering, although the pace of growth is moderate. During the past 12 months, middle market companies added 540,000 new jobs, according to the ADP National Employment Report.
Supporting middle market companies is one way to help the U.S. economy grow. Challenges affecting middle market companies include concerns surrounding the Affordable Care Act (ACA), uncertainty about federal government policies, rising interest rates and shortages of skilled human capital, according to Deloitte’s Mid-Market Perspectives, released in November 2013.
Mid-market growth rates & forecast
Despite the economy, middle market companies have enjoyed fairly consistent growth rates since 2008. For the fourth quarter of 2013, the average increase in revenue reported by middle market companies was 5 percent, according to Axial Markets. Middle market companies reported that they’ve been adding new employees, with an average of 2.5 percent growth in employment across the middle market. The CIT Middle Market study notes that 46 percent of those surveyed anticipate an increase in the size of their workforce in the coming year, another sign of recovering health in the middle market employment market.
These numbers are in line with the Deloitte survey, which notes that 58 percent of executives surveyed reported higher revenue in the fall of 2013 versus 44 percent in the spring. More executives are also reporting increases in profitability, cash balances and productivity. More than half of those surveyed expect higher revenues and increased productivity to continue into 2014. According to a study by CIT, middle market executives expect growth will come through a combination of horizontal growth, vertical growth and diversification, such as increasing the range of products and services offered in current markets, as well as expanding into adjacent markets.
Mid-market companies plan to invest in technology, human capital, property, plant, equipment and research and development. The top priorities for technology investing dollars are business process automation, cloud computing and data analytics.
Supporting middle market companies
Middle market company executives find their greatest challenges with uncertainties surrounding government policies and implementation of the ACA. Certainty around the federal budget and consistent bipartisan cooperation in Washington, D.C., which would avoid a repeat of issues like the government shutdown that occurred in the fall of 2013, would go a long way to alleviate such concerns.
The ACA remains a top concern for middle market companies. There is fear that compliance costs associated with healthcare reform will substantially increase costs for middle market companies. The Deloitte survey revealed that “rolling back healthcare reform” would be the “most impactful measure” the government could take to support middle market businesses in the next year.
Rising interest rates are another concern for middle market companies, as higher interest rates can increase borrowing costs and could also put the brakes on U.S. economic growth. Although the Federal Reserve Board is expected to increase interest rates, this is unlikely to happen before 2015. While the current effort to remove liquidity from the financial system is increasing longer-term interest rates, those rates are still low by historic standards.
Lastly, middle market executives remain concerned about a lack of skilled workers. Companies are spending more on training and increasing compensation to attract the talent they need.
A final word
Middle market companies are a major growth engine for the U.S. economy. As the U.S. economy continues to recover, and with support around their most important challenges, middle market companies are likely to grow more rapidly and provide jobs for even more Americans.
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