The economic recovery has been a long journey with regular setbacks. But in a sign that the tide may have definitively turned for the U.S. economy, the latest National Center for the Middle Market (NCMM) Indicator survey found continued, strong revenue generation and economic optimism across broad segments of the middle market.

Businesses with annual revenue between $10 million and $1 billion employ 41 million people and contribute about a third of the nation's gross domestic product. And they are recovering more quickly than other sectors of the economy, suggests a survey of 1,000 C-suite executives from midmarket firms conducted by the NCMM, a research partnership of The Ohio State University Fisher College of Business and GE Capital.

For one thing, the survey indicates revenue is growing nearly twice as fast in the middle market as among the S&P 500. Survey respondents reported year-over-year revenue increases of 6.6 percent in the second quarter of 2014, which was on top of 6.5 percent gains in the first quarter. Overall, 69 percent of surveyed companies reported an increase, while just 11 percent reported a decline in the second quarter. What's more, executives' outlooks are broadly positive: Seventy percent said they expect revenues to increase over the next 12 months, by an average of 5.8 percent. That's a big jump from the first quarter, when 59 percent said they expected revenues to increase. And today, about a quarter of executives expect revenue growth above 10 percent.

Another telling result of the survey concerned employment. In the second quarter, 44 percent of respondents said employment increased over the past year, compared with 14 percent who reported declines. For the middle market as a whole, employment rose 3.2 percent; the group expects employment to grow another 3.3 percent over the next 12 months. Also, there is growing concern among respondents about finding and retaining talent, a good indicator that employment and wages may rise further.

At the macro level, executives also expressed optimism. When asked to rank their confidence in the U.S. economy, more than two-thirds of respondents—68 percent—reported being at least somewhat confident. This suggests that growth will continue. In fact, the survey suggests 62 percent of midmarket executives believe the U.S. economy will grow over the next 12 months, a significant 12 percentage point uptick over the first quarter. And only 9 percent believe the economy will contract. On average, survey respondents expect the U.S. economy to grow by 1.7 percent over the next 12 months, which is the highest rate predicted in any of the past four quarters.

Four industry sectors are particularly optimistic about their prospects over the next 12 months and expect revenue growth above the national average: construction (8.1 percent growth), services (8 percent growth), manufacturing (7.2 growth), and financial services (6.7 growth). Construction firms are also optimistic about employment; they plan to hire new employees so quickly that their workforce will grow by 5.1 percent over the next 12 months.

Challenges Remain

Despite these positive signs, the survey indicated some challenges for midmarket businesses. Health care costs remain a top concern for respondents. The number of midmarket executives citing the cost of health care as “highly challenging” bounced back to 54 percent in Q2/2014 after dipping to 46 percent in the first quarter.

In addition, executives are increasingly concerned about government actions. Half said that the regulatory environment is more restrictive than it was a year ago. Another major concern is uncertainty about tax policies; 20 percent said corporate tax planning is highly challenging. That's up from 13 percent in the last quarter, which suggests that executives have a dim view of lawmakers' ability to compromise on tax reform.

Two other challenges that CFOs always pay close attention to—access to capital and borrowing costs—are becoming easier for midmarket businesses. In the second quarter, 42 percent of respondents described access to capital or financing as highly or somewhat challenging, down from 51 percent in the first quarter. Similarly, 37 percent said borrowing costs were highly or somewhat challenging, down from 47 percent in the first quarter.

Investment Remains Flat

One way the survey gauges the mind-set of executives is by asking what they would do if given an additional dollar. The latest report shows that 37 percent would keep the extra cash on hand rather than investing it in their business right away—although close to half of those said they would hold the cash for future investment (see Figure 1). Thirty-seven percent is a rather high proportion to hold onto the cash, but that number has been consistent over the past several quarters, going back to 2012.

The take-away is that despite strong revenue growth and steady hiring, and expectations that we will continue to see more of the same, a large proportion of executives said they aren't likely to increase spending. In comparison with the first quarter of 2014, a lower proportion of middle-market executives said in Q2 that they would spend additional earnings on training and development, or on capital expenditures (plant, equipment, or facilities).

When considered in combination, this survey's findings are very interesting. Many executives expect their business to continue to grow, but since they're not planning to increase spending, they must believe they can lock in that growth through productivity gains alone. As every treasurer knows, sustainable growth requires finding the right balance between maintaining cash reserves and making smart investments in the future of the business.

The reluctance to make major outlays in today's economic climate is understandable. Not only are they looking at a fitful economic recovery, but midsize companies tend to be conservatively run, family-owned businesses in the habit of guarding every dollar and eschewing risk. Nevertheless, treasurers and other finance managers who intend to keep growing should ask themselves whether their expectations around capital investments are realistic to continue to capture growth, or whether they should be planning to invest more in people and equipment.

—————————————-

Bob McCarrick is chief commercial officer, lending at GE Capital, Corporate Finance, which specializes in providing commercial loans and equipment finance to midsize companies for growth, acquisitions, turnarounds, and balance sheet optimization.

Instant Insights /

What&rsquo;s Driving Growth Strategies in the Midmarket?

Related Stories

Recommended For You

What’s Driving Growth Strategies in the Midmarket?