Three months ago, we saw little evidence that performance had weakened or that actual plans had changed. Now we do.

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Now we do. This quarter’s report shows the biggest one-quarter drops in revenue and employment growth in the eight-year history of the MMI. One has to go back to the end of 2014 for a similarly low rate of top-line growth, and to the beginning of 2016 for similar job growth rates.

In the third quarter we also saw, for the first time in the last year, evidence that middle market executives are pulling back some planned investments and expansion. To summarize, we now see changes in performance and behavior as well as in sentiment.

The exhibit here demonstrates how middle market executives have turned down the dial on plans for expansion in the months to come.

The biggest drop, both absolutely and in percentage terms, is in plans to make an acquisition, which is the expansion activity that has the least to do with continuing operations. Plans for new facilities, new products, and new market entries—activities closer to the core business—have not been cut as much (though they have been cut).

Cloudy or stormy?

It is important not to make too much of these downward-pointing numbers. For one thing, they are just one quarter’s data. It is possible to get anomalous signals, even in a sample as large as the MMI, which polls 1,000 leaders. In the first quarter of 2017, the MMI recorded a huge upward spike; revenue growth jumped from a 6.9% rate to 9.2%—then settled right down to 6.7% the quarter after. This might be a similar outlier. In addition, though the growth numbers are down, they are not bad. At 5.8%, middle market revenue growth was higher than the S&P 500 rate of 2.1%. Middle market employment growth of 4.1%—in just one year—looks robust when you consider that the total number of employed persons in the U.S. has grown by about 8% over the last five years.

A look deeper into the numbers reveals interesting nuances. Just 7% of companies reported deteriorating performance. This is up from 6% a quarter before, but it is exactly the average over the history of the MMI. Compared to last quarter, the big difference in overall performance is that fewer companies say performance has improved. More say it has stayed the same, but not many are suffering. Among growing companies, there is a substantial drop in the percentage that grew 10% or faster. Last quarter, 38% of the middle market qualified as these so-called “Growth Champions”; this quarter, only 28% made the cut. Similarly, the number of firms hiring aggressively (whose workforces increased 10% or more in the last twelve months) fell from 30% to 23%. These numbers open the possibility that the slowdown, while general, has affected the fastest-growing middle market companies more than it has the sector as a whole. That’s not to say it’s confined to a small group; after all, in Q2 nearly two out of five middle market companies were Growth Champions.

Looking ahead, we should watch for three things. Foremost, in three months, will we see growth and hiring continuing at a lower level, or will it rebound? Second, will investment activity drop further, and cut more deeply into core business areas? And third, what will sentiment show? The confidence numbers this quarter are the lowest we have seen since 2016. Asked to name the top three long-term challenges, 18% of middle market executives volunteered “the economy,” compared to just 10% in Q2 and 11% a year ago. If those feelings don’t change, it is unlikely that investment will pick up.

See all of the data reported in the 3Q 2019 Middle Market Indicator.