Testing Limits
Average annual revenue growth for middle market companies has risen four quarters in a row—reaching 8.4% in this report. That’s more than two and a half points higher than the Middle Market Indicator’s historical average. On its face, growth that fast appears to be unsustainable over time: A company that grows at 8.4% a year doubles in size in fewer than nine years. Yet the expansion experienced by the middle market is echoed by growth in the broader economy.
The data in this MMI were collected in the first two weeks of March 2018, so the annualized numbers executives report is for the period that began in March 2017. Public-company data during that period tell a similar growth story for the last year, if not quite such a powerful one. The NASDAQ Index rose from 4861 to 7560, a 29% increase. The Dow rose just a little less. The S&P index increased 17% and revenues of S&P component companies increased 7.4%. While the middle market led the way, it doesn’t seem to have been sprinting ahead unconnected to the rest of the economy. Moreover, as we noted last quarter, just about every company has been participating in the middle market’s growth. In the first quarter a record high 72% of middle market leaders said their company’s performance improved in the last year, while only 3%—a record low—said it deteriorated. That is a 24:1 ratio of winners to losers.
Whether this is sustainable growth or the final acceleration of an expansion that is about to slow, middle market companies continue to play the role we’ve seen and documented for seven years: turning in the strongest performance and providing the fastest job creation in the American economy.
Looking Confident
Given the excellent results of the middle market across the board, it is not surprising that executives express high confidence in the state of the economy. The data on page 4 show the sum of the top three boxes on a seven-point scale: extremely confident, very confident, or somewhat confident about economic conditions.
A more complex story emerges if we look at only the top two boxes, which include executives who say they are “extremely” or “very” confident.
- The global number drops quite a lot, to 29%. And there are regional differences, with companies in the West and Northeast more confident about the world economy than companies in the Midwest or South.
- High confidence in the national economy comes in at 50%. Again, the West is most bullish, with 55% of companies saying they are extremely or very confident.
- Local conditions vary most. Overall, 53% of middle market companies are extremely or very confident about local conditions. But in the South, local confidence comes in at 57%; in the Midwest, 55%; the West, 53%; and the Northeast, just 42%.
Company size also plays a role in executive confidence. Across the board, leaders of larger middle market companies (with revenues between $100 million and $1 billion) are more confident than their smaller kindred; for example, 57% of upper middle market companies are extremely or very confident about the U.S. economy, vs. 48% of the core middle market ($50-$100 million in sales) and 46% of those with revenues between $10 million and $50 million.
The most striking difference by industry is the ebullience of people in wholesale trade, 60% of whom express high confidence in the U.S. economy. (We should note that the wholesale trade sample size is small and therefore prone to volatility: Three months ago, 42% of wholesalers were similarly confident.) It’s notable that local-economy confidence is high among construction and business and financial services, which arguably have more intimate knowledge of demand in their region than, say, manufacturers. Retailers fall into the middle of the range.
Going Boldly
Confidence is both the begetter and the progeny of growth investments. Given an extra dollar of revenue, the typical middle market company would bank 14 cents as a cushion and put 86 cents to work immediately or soon. For very or highly confident companies, 91 cents would go to work. Those confident executives would put 28 cents into new capital spending (vs. 23 cents for the typical company) and 12 cents into new hiring (vs. a dime).
Interestingly, confidence doesn’t seem to affect IT spending. The highly confident would put 18 cents of that extra dollar into more information technology, a penny less than the middle market as a whole. Tax treatment affects IT spending more—see Spotlight, page 6. It may be that a majority of companies still view IT primarily as a cost of operating or defending their business rather than as a tool for transformation and growth.