What They Say, What They Do

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Middle market companies have closed the books on a very satisfying 2018. But they face 2019 with ambivalence. On the one hand, confidence has slipped; challenges appear more diverse and more daunting; their short-term outlook has darkened. On the other, their appetite—the money they intend to invest in innovation, opening new markets, and building new facilities—continues to be robust. If they are seeing warning signals, they appear not to be slowing down.

Seventy-three percent of companies said their performance improved. This is the highest percentage ever recorded by the MMI. Just 5% said business deteriorated, making for a nearly 15:1 ratio of winners to losers. This despite slowly increasing headwinds from tariffs, rising interest rates, labor shortages and higher labor costs, lower growth in China, and a bad year in public equity markets. (The Russell 2000 index peaked at 1741 on August 31 and closed the year at 1349. During the two weeks that this quarter’s data were collected—December 1-15—the index fell from 1549 to 1411.)

The vast majority of middle market companies are privately held, but executive jitters show up in this MMI in the form of dips in confidence and, particularly, the Short-Term Index, which dropped from 100 to 74 in the second half of the year. (See p. 4.) The Index looks at forecasts for the business climate, demand, and sales for the next three months. For each, it subtracts negative sentiment (“sales will fall”) from positive (“sales will rise”). Interestingly, almost all the drop in the Index is due to declining positive sentiment. The negatives are virtually unchanged. As of now, executives don’t see things getting worse; but fewer think things are getting better.

It thus makes sense that forward-looking activity hasn’t changed, even though forward-looking sentiment has. Compared to a year ago, a middle market company’s likelihood of introducing a new product, expanding into new domestic markets, or adding a new plant or facility is unchanged; investment appetite is slightly higher, as is the likelihood of international expansion; overall capital spending is up a bit and access to capital is unchanged. IT spending increased substantially as companies focus on cybersecurity and digital transformation. (See Spotlight, p. 6.) Forecasted hiring is the only downer—and that could be because fewer people are unemployed.


A witty Danish proverb says that predictions are difficult, especially about the future. Clearly there is more risk in 2019’s environment than in the last few years, and therefore more reason to manage and hedge against risk. There is also more uncertainty—that is (as the economist John Maynard Keynes said), matters for which no calculation of risk can be made, about which “we simply do not know,” and about which we must nevertheless plan and act. For Keynes, the great defense against uncertainty was liquidity—money held in reserve.

We might expand his view to include agility—human capital that can be deployed in new ways, resilient and reconfigurable supply chains, the strategic nimbleness to dodge a punch or exploit an opening. In The DNA of Middle Market Growth,* we analyzed five years of MMI data and identified seven growth drivers that are under management’s control and largely independent of economic factors. This quarter our respondents told us they are by far most confident of their abilities in one of them: 63% say they are excellent or very good at financial management. But just 41% rate themselves that highly when it comes to developing people. (The other growth drivers—innovation and investment, expansion, attracting talent, and cost efficiencies—cluster in the middle.) A good New Year’s resolution might be to strengthen both liquidity and agility, and improve the capabilities that support all seven growth drivers.

*NCMM, THE DNA of Middle Market Growth, 2018.