According to a recent survey from the National Center for the Middle Market (NCMM), over the course of 2019, middle market businesses within the San Francisco Bay Area, Silicon Valley and nationwide, were decidedly cautious. While most companies grew, the rates of both revenue and employment growth declined over the first three quarters of the year. Economic confidence, investment appetites, and both short- and long-term projections fell in tandem. The Q4 numbers, however, paint a different picture. All of these indicators reversed course—some more notably than others—to close out the year on a much more positive note. This mirrors other cautious trends highlighted in surveys of CFOs and CEOs both nationally and locally.
While the rebound is clearly evident, it is far from complete. Compared to one year ago, actual growth numbers as well as future projections are at considerably lower levels. While the Short Term Index rose over 20 points from last quarter, it remains well off its high mark. Still, with confidence, investment appetites, and expansion plans recovering much more robustly, the middle market may well be poised to begin 2020 on a strong note. However, with projections and confidence trending downwards, CFOs in general have been stockpiling cash reserves in order to deal with increasing uncertainty about the future.
Overall, two-thirds (67 percent) of middle market companies report improved company performance compared to one year ago, up from 60 percent who said the same last quarter, but down from 73 percent at the end of 2018. Just 8 percent say performance deteriorated over the course of 2019. While sentiment is pointing up, and 73 percent of companies saw revenue growth this year, the rate of year-over-year revenue growth (7.5 percent) is lower than it was during most of 2018 and the first half of 2019. In addition, the proportion of middle market companies reporting no growth or decreasing revenues rose from 21 percent one year ago to 27 percent today. In 2019, fewer than half (48 percent) of middle market companies grew the size of their workforce, and that rate of growth (5 percent) has declined since 2018 as well.
Looking ahead, revenue and employment growth projections, while up notably from Q3, also remain below those forecasted over the past several years. Overall, a majority of companies (55 percent) say revenues will increase in 2020 and 42 percent say they will experience employment growth, albeit at more modest rates (4.9 percent for revenues; 3.5 percent for employment). Interestingly, upper middle market firms (with revenues between $100 million and $1 billion) report lower actual and projected revenue growth numbers than their smaller peers.
Despite lower overall projections for the year ahead, many middle market companies appear to be anticipating good things for this first quarter of 2020. For the first time in six months, the Short Term Middle Market Index is up, and strongly so. Many companies are anticipating a more favorable business climate, nearly half of firms expect sales to increase, and 37 percent expect to increase the size of the workforce over the next three months. However, another 10 percent say they will cut jobs.
Perhaps the strongest signs of a potential return to strong growth are confidence levels and investment appetites. Both indicators have rebounded to near their all-time highs. Almost half of middle market companies have plans to introduce a new product or service in 2020 and almost as many expect to expand into new domestic markets. Companies also show an increased interest in putting extra money toward information technology, and, as we’ve seen in several recent studies, companies that embrace IT and digital transformation grow faster than their peers.
Many core business challenges will persist in 2020. Talent management and maintaining growth, as always, are challenges to performance goals. These challenges are particularly pronounced for the 27 percent of middle market companies that reported no revenue growth or declining revenues in 2019. Costs, especially those related to import and export tariffs, are a problem for these firms as well. While economy-related concerns have diminished since last quarter, government challenges have increased as middle market executives contend with political and interest rate uncertainty and begin to consider the potential impact of the next U.S. presidential election.
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