As 2020 began, cautious optimism reigned in the middle market. Then the pandemic hit.


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From “What Happened?” to “Now What?”

Six months ago, as 2020 began, cautious optimism reigned in the middle market. Growth forecasts, expected hiring, and economic confidence were high, although trending slightly lower compared to the robust performance and glowing optimism of the last half of the decade that was ending. The long expansion seemed long in the tooth, but it was still expanding.

Then—boom.

When we talked to middle market executives in March, two weeks after the World Health Organization declared COVID-19 a pandemic and as much of business locked down, 25% feared a “catastrophic” impact on their business. Three out of four—76%—said “ongoing uncertainty” was one of their top three challenges, followed closely by “continuity of operations.” The great economist John Maynard Keynes described uncertainty this way: “About [uncertain] matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact.”

We simply do not know: That is where the middle market found itself in March. Like someone who had fallen into a gully, the middle market first asked, “What happened?” and moved its limbs to see if anything was broken.

Three months later, one out of eight expect catastrophe—a better number, but still a bad one. Executives still find themselves facing uncertainty (according to 66% in our June COVID-19 report) but they are turning to the necessity for action and decision. Executives have gone from reaction to reality. What first? What next? What then? The answer seems to be people and customers first. Get them back and feeling safe. We’ll work it out from there.

A Hazy Outlook

It is too early to forecast the timing and pace of recovery, or how business will look and feel next quarter, next year, or five years from now. No sooner was this survey completed than COVID-19 cases began to surge in the West and South, where the disease had been relatively quiescent. But in the fog of the future we can discern some ways in which middle market companies—historically the most dynamic and fastest-growing part of the economy—will shape their future.

One is the overall resilience of middle market companies. Though economic confidence is at or near record-low levels, just 17% of executives expect the next quarter’s sales to be down; their estimation of underlying demand for their offerings is essentially unchanged for the last year and a half. Overall, companies expect that the road out of the gully may be a long one, but it leads upward. They also, generally, have the ability to absorb a punch (more than small business) and the agility to respond quickly to an opportunity (more than big business). Tempering this optimism: Just 38% say getting access to the capital they need is somewhat or very easy, while 20% say it is somewhat or very hard, a two-to-one ratio; the corresponding numbers six months ago were 53% and 14%, nearly four-to-one.

Second, the next few months will favor those who prepared beforehand. Forty-seven percent of middle market companies saying they have easy access to capital also say that the impact of the pandemic has been low. Companies with an “excellent” or “very good” long-term growth strategy in place are almost half again as likely to have had a low impact as those less planful. Similarly, companies that give themselves high marks for retaining talented employees are much less likely to say the pandemic hit them hard than companies less attentive to their human capital. The same holds true for companies that invest sufficiently for the future. As companies grow, processes such as planning become increasingly important, a phenomenon we documented during the long expansion.

These capabilities will make for an easier road through the challenging times ahead. The middle market as a whole sees growth of 2.0% in the next 12 months. Those confident in their ability to get capital foresee growth of 6%, while companies that invest sufficiently expect 5.7% growth. The strong strategic planners see 5% growth, and talent-keepers see 4.7% growth.

Third, many executives intend to use forthcoming months not just to recover, but to change. The impact of the pandemic on digital transformation efforts has been slightly more positive than negative: 27% cite a positive impact, 25% a negative. (For companies in business services, 36% see a positive impact; in healthcare, 34%.) This contrasts to largely negative impacts in areas such as capital spending (16% positive, 42% negative) and growth initiatives (21% positive, 52% negative.) It is often said that a crisis can accelerate trends that already exist. COVID-19’s effect on digital transformation appears to be an example.