The middle market ended 2019 with a bounce back—partly back, at least—from the worrisome performance we reported in the third quarter.

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How Big a Bounce?

The middle market ended 2019 with a bounce back—partly back, at least—from the worrisome performance we reported in the third quarter. But is it back to business as usual? Does the middle market enter the new decade boldly or anxiously?

Last quarter we said we would watch three things: whether revenue growth and hiring rebound; whether investment activity increases or falls further; and whether sentiment—confidence—continues its downward path. All three have recovered. At the same time, all show continuing signs of relative weakness.


Take growth. Year-over-year revenue growth jumped from 5.8% to 7.5%. That is below the 8% range we saw in the last couple of years, but it is well above the historical average and consistent with the thesis that last quarter was a one-time dip.

Growth projections, however, tell a less optimistic tale. Each quarter we ask executives to report on last year’s growth and forecast what next year’s will be. Middle market executives typically lowball these predictions. As you can see, a year ago the middle market projected 5.9% growth and delivered 7.5%. Worrisome here are not the absolute numbers in the forecasts, but their direction—as the chart shows, there’s a slow downward drift. It suggests that revenue growth in the next few quarters will stay below the 8% numbers we saw in 2018 and the first half of 2019.

Employment growth projections show a similar declining trend line. Furthermore, a growing number of executives say they will reduce their workforce in the next three months. From an all-time low of 3% two years ago, that number has slowly but steadily risen to 10%.


Investment plans are more bullish. The number of companies whose plans for the year ahead included adding a new plant or facility, introducing a new product, entering a new domestic market, entering a new foreign market, and making an acquisition all dropped in the third quarter. All look much better now. In particular, domestic expansion plans are at an historic high; new product plans are near their peaks. But international expansion remains low, probably because of the extra costs and uncertainties of trade conflict. Both M&A and opening new plants, while better than last quarter, are below typical levels.

One interpretation: Leaders are holding back on expansion plans that require big, irrevocable commitments (new facilities, global markets, acquisitions) while moving strongly ahead with plans that are easier to trim or adjust (new products, new domestic markets). That interpretation is consistent with what we see in the third dimension, confidence.


Most confidence indicators have improved, suggesting that their slide might have bottomed out in the 3rd quarter of 2019. One indicator: Last quarter, 18% of executives cited “the economy” as one of their top three long-term challenges—the highest we had seen in five years. That number is now just 10%—tied for the lowest. Twenty-six percent expect the business climate to improve, up from 17% three months ago; 11% say it will be worse, down from 16%. And, asked what they would do if they had an extra dollar, the number of executives who say they would invest it jumped back up to 70%—a high number—after four quarters in which it had declined, reaching just 56% three months ago.

But the caution bell still tolls. The most popular choice for a place to put that extra dollar is information technology, picked by 18% of leaders. The second most popular, at 17%, is to stash it as cash. That is, executives are more likely to say they would put money into a rainy day fund than into plant and equipment, new hiring, training, or facilities. It seems they are not convinced that the economy will support their growth ambitions and are holding cash in reserve in case they need it. Another sign of a cooling economy: concern about costs, which had risen steadily from 2016 to the middle of 2018, when 26% cited costs among their top three challenges; only 15% say so now—back exactly to where it was in the first quarter of 2016.

It is important not to make too much of these notes of caution. They are there; but the middle market’s dominant tune continues to be optimistic, supported by a steady drumbeat of growth, hiring, innovation, investment, and (increasingly) digital transformation.