This is a quarterly blog post summarizing the economic state of the Middle Market from the standpoint of the NCMM's Middle Market Indicator (MMI), the ADP Employment Report, and other economic indicators. It is produced by Bill LaFayette, Ph.D., owner of Regionomics®, a Columbus, Ohio-based economic and workforce strategy firm.
Last week, the U.S. Bureau of Economic Analysis released the shutdown-delayed initial estimate of third-quarter Gross Domestic Product (GDP). It was seemingly very good news: annualized growth was 2.8 percent, considerably beating the 2.1 percent average forecast in the most recent Wall Street Journal Economic Forecasting Survey. But digging into the numbers reveals a much less positive picture. Of the total 2.8 percent growth, 0.8 percent was due to inventory accumulation above that expected going into the holiday shopping season. Deducting that factor leaves a rate of growth in line with expectations. Further, consumer spending slowed to its weakest growth in more than two years and all non-inventory categories of business investment likewise weakened.
However, the view for coming quarters continues to be one of gradual improvement. Inventory balances in the GDP accounts have not declined in two years. These increases will be a drag on output in coming quarters unless demand strengthens considerably. The economists in the Wall Street Journal survey expect growth this quarter of 2.2 percent, with a gradual acceleration to a moderate 2.9 percent pace at the end of 2014. (It is worth noting that this is almost exactly the same as the expectation for 2013 reported this time last year.)
The results of the most recent MMI are broadly similar to those of recent quarters. The only notable negative results are significant declines in the proportion of Middle Market leaders expecting higher growth in the coming year and in the overall expected rate of growth for all Middle Market firms. However, two-thirds of firms report improving revenues over the past year - the same percentage as last quarter. Employment growth averaged 2.8 percent, more than a percentage point above year-over-year employment growth in the broader economy. Most other indicators, including trailing revenue and employment growth, expected employment growth, and the degree of confidence in global, national, and local economies have remained stable. Implementation of the Affordable Care Act, unrest in Syria and elsewhere in the Middle East, and slowing growth in emerging markets continue to weigh on the minds of Middle Market leaders.
This survey was conducted in early September when the government shutdown was only a worry. Consumer confidence during this time, as measured by the Thomson Reuters/University of Michigan Consumer Sentiment Index, declined from August. The index declined further in October, reaching a 15-month low. Because Middle Market leaders are also consumers, it is possible that their mood has also darkened since the MMI was collected.
The ADP Employment Report is based on the payroll processed by ADP, and is adjusted by Moody's Analytics to mirror the private-sector employment changes reported by the Bureau of Labor Statistics (BLS) in its monthly Current Employment Statistics. ADP reports employment growth by company size; the 50 to 499-employee category is used as an imperfect approximation of the Middle Market. As shown in the chart, employment growth in this category has generally exceeded the average since January 2010, when net job growth became positive. Employment growth among employers of between 50 and 499 was weaker than average over the past three months, however - 0.22 percent compared to the 0.37 percent private-sector average. It will be important to continue to monitor this indicator, and to see the employment growth results in next quarter's MMI.