In Unprecedented Times, the Middle Market Strikes a Cautious Path Forward

The COVID-19 pandemic has produced conditions never before seen in the eight-year history of the Middle Market Indicator (MMI). The Middle Market Indicator (MMI), produced by the National Center for the Middle Market, is a quarterly business performance update and economic outlook survey conducted among 1000 middle market C-suite

Fewer companies than ever say their past-year performance has improved: 37 percent, compared to the historical MMI average of 63 percent. Twenty-five percent say performance has deteriorated, nearly double the worst rate on record, reached during the 2012 Greek bailout and fiscal cliff debate.

The proportion of executives expressing confidence in the local economy also fell to a record low. Similarly, the proportion confident in the national economy has fallen to a level not observed since 2013. Average past-year revenues declined by 3.7 percent, the first time the middle market has reported a negative number for year-over-year growth, and more than ten percentage points below the historical average growth rate of 6.6 percent. About two out of five firms, 42 percent, reported lower revenues, compared to 13 percent for the year ending 4Q 2019.

The employment growth rate was also negative, dropping to -4.4 percent, meaning the middle market shed jobs like the rest of the economy. This also is the first time the middle market has failed to add jobs. Three-quarters of executives say their workforce size either decreased, 32 percent, or remained the same, 43 percent, in the 12 months ending 2Q 2020.

Many companies have put investment plans on hold. Asked what they would do with an extra dollar in 4Q 2019, 70 percent said they would put the money immediately to work, with the rest saying they would put it aside either as a cushion or to fund future investments. Today that number has fallen to 52 percent, the second lowest figure ever recorded. Two-thirds of these savers would hold it as cash, in a rainy-day fund, while just one-third would hold it for future investments. For those who would put the money to work for their business, the top investment destination is information technology.

The proportion forging ahead with expansion plans has also dropped. In the next 12 months 37 percent say they will enter new markets, compared to 50 percent in 4Q 2019. Thirteen percent expect to build a new facility, versus 24 percent at the end of 2019.

Despite the changing business climate, there have been only minor shifts in the middle market’s core challenges. The pursuit of growth and the need for talent continue to act as the most pressing issues for executives. The economy is a growing challenge, jumping ahead of costs and competition in this Middle Market Indicator report.

The proportion of executives who rate cost as a top near-term external challenge fell by 11 percentage points, to 6 percent. With all that said, the middle market also sees some better times ahead. Executives overwhelmingly believe sales in the next three months will increase from their June levels. This has lifted the Short Term Index1 —which had plummeted in March—back to its December 2019 level, although the magnitude of the expected rebound is unclear. Looking ahead a full 12 months, revenue and employment growth projections are far below what they were when last year ended. The middle market anticipates 2.0 percent revenue growth, the lowest forecast on record and substantially below average actual revenue growth of 6.6 percent since 2012. In December, companies predicted 4.9 percent revenue growth. Executives expect employment to shrink by 0.2 percent in the 12 months ahead, the MMI’s first negative employment projection; but if it holds true, it means that the middle market expects to stem the job losses caused by the COVID-19 pandemic. It is worth noting that the data in this survey were collected in the first two weeks of June 2020. At that time, American states had begun to reopen for business, some widely, some more cautiously. New COVID-19 cases had fallen in the hard-hit Northeast, but the surge in cases in the South and West had not yet become evident. Considerable uncertainty remains. Companies’ plans and performance will depend on how the pandemic evolves, and on the ability of society and science to contain it. Successful prevention, mitigation, or treatment would support growth and employment, but even under the best circumstances it will take time for the middle market to recover.

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