The Short and the Long of It
Business is excellent for most companies in the middle market,
but amid the resounding boom of the present can also be heard
an ominous rumble of thunder.
Before getting to the thunder—or before it gets to us—we should
look at how well middle market companies are performing. Annualized
revenue growth rates have been 7% or higher four quarters in a row,
something we have not seen since the MMI began in 2012. Projected
revenue growth for the year ahead is running just under its historical
high (apart from an anomalous spike in the first quarter of 2017).
Seventy-two percent of companies report improved overall
year-on-year performance, which ties the record set three months
ago. In the background, meanwhile, the U.S. economy as a whole
has expanded for eight years and 11 months, only 13 months shy
of the longest expansion in its history.
For now, middle market executives are reporting strong sales order
activity. Forty-three percent say their new order pipeline has increased
since a year ago, and among those companies the average increase
in orders is 12.3%. Both are the highest numbers ever recorded. The
NCMM’s short-term index stands at 100, the highest since that standout
first quarter of 2017. The index combines positive and negative opinions
about three things: the business climate, overall demand for the products
or services a company sells, and how much of that demand executives
think their company will book as sales. Of those three elements, sales
(the most concrete) is up the most, followed by demand; business
climate (the most subjective) is more or less unchanged.
And therein—in subjective sentiments—lies the rub. The MMI
measures executives’ confidence in global, national, and local
economic conditions. All three declined this quarter, with confidence
in the global economy dropping most. At 75% (global), 86% (U.S),
and 90% (local), all remain higher than they were a year ago; in fact,
one quarter’s decline doesn’t necessarily constitute a turning point.
But a dip in confidence is of more than psychological importance:
New and related research from the Center, derived from analysis
of five years of MMI data, shows that economic confidence accounts
for more than 30% of overall company growth.1
It is not hard to find a cause for the anxiety: Ten percent of middle
market executives are concerned about the cost implications of
tariffs. That is five times the average of the previous three years.
The sentiments reported in this MMI were gathered during the first
two weeks of June 2018, at the beginning of what it appears will be
a U.S-instigated global trade war. Just before the survey went out,
the U.S. imposed tariffs on steel and aluminum from Canada, Mexico,
and the EU; they reciprocated with tariffs on baskets of U.S. goods.
A month later, in early July, the U.S. hit China with $34 billion in tariffs,
which struck back in retaliation.
Not surprisingly, wholesalers are most anxious about trade conflict, since
they will have to deal with tariffs on both exports and imports—33% of
wholesalers worry about the impact of tariffs. Manufacturers come next:
Twelve percent are concerned—. Manufacturers, too, might be taxed
both coming (raw materials and components) and going (intermediate
or finished goods). The cost of raw materials is an issue as well: Twice
as many executives cite raw material costs as a major issue as did a year
ago. Those, too, may be affected by trade policy.
We have noted before that the middle market is primarily domestic, but
that internationally-minded middle market companies outperform their
peers,2 which means that their fate in a trade war will disproportionately
affect the overall growth of the middle market. It is worth noting that
globally-minded mid-sized companies are much less likely than big firms
to have production facilities abroad, which makes them less able than
large multinationals to skirt trade barriers by relocating operations from
one country to another.
Overall, 26% of executives listed a cost issue among their three biggest
long-term challenges, which is a big jump from the 17% who cited costs
a year ago. The biggest driver is wages and benefits, as companies offer
better packages to attract and keep employees in what has become a
seller’s market for talent.
And how are they going to cope with cost increases? Far and away
the most popular plan among executives is to sell more products and
services—which means they’d better hope the economy stays strong.
1 NCMM, The DNA of Middle Market Growth, 2018
2 NCMM and The Brookings Institution, Accelerating Exports in the Middle Market, 2014