The middle market continues to be a stable engine of growth.

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As we reach the mid-point of 2023, the middle market continues to be a stable engine of growth as evidenced by the good news coming out of the latest survey. The past two years have seen sustained results across several of the dimensions as measured by the NCMM via the Middle Market Indicator, particularly top-line revenue and employment growth. Three-quarters of companies say their overall performance has improved from a year ago. Confidence in the various levels of the economy remains strong, and investment planning finally is on the upswing after lagging for several periods.

But there are growing external challenges facing the middle market, all of which have the potential to impact future performance for the balance of this year, and beyond. While inflation has moderated and started to decrease, it is still top of mind for most companies.  In fact, government and the macro economy are cited as some of the most significant long-term challenges. Workforce remains another issue to tackle, given the challenges not only finding people but finding those with the right skills. Finally, digital transformation represents a tremendous opportunity while also introducing uncertainty and risk, especially for a transformative process such as generative AI.

Growth is strong, but possibly moderating

The MMI measures both top-line revenue growth rates, as well as employment, for the prior twelve months. After three waves of record year-over-year growth rates, revenue growth (11.8% vs. 12.2% for year-end 2022) and employment growth (10.1% vs. 11.1% in 2022) both appear to indicate a slowdown for the middle market. Compared to historic averages, these are still quite impressive results. For instance, since the launch of the MMI – which includes the pandemic-induced declines of 2020 – the averages for revenue growth and employment growth are 7.0% and 4.6%, respectively.  

We can look at other indicators to gain a better perspective of how the middle market is doing overall. Economic confidence in all three levels measured – global, national, and local – remains virtually unchanged the past six months. Digging a bit deeper on growth rates, over 80% of companies reported positive revenue growth; in fact, 52% reported greater than 10% growth in the past 12 months. Similarly, 56% of middle market firms added employees over the past year.  Future projections indicate lower growth going forward: 9.6% for revenue, and 10% for employment.

Investment plans starting to gain steam

Over the past several years the middle market has demonstrated a strong, consistent rebound from the pandemic. But investment planning continued to lag as leaders approached the uncertain environment with a sense of caution and conservatism. Historically, seven in 10 companies have planned to re-invest back into the business across various activities; since 2021 that average has consistently been in the mid-fifties.  

This reporting period, there is an uptick in investment plans as 60% of respondents tell us they are looking to make investments into their business. The top targets include physical assets like plant and equipment, IT and technology platforms such as Cloud and cybersecurity, and then continuing to add more people. Another signal lies in the expansionary activities undertaken since the summer of 2022 – nearly three out of five companies have introduced a new product or service during the past year, and nearly 40% have entered new domestic markets. There is an appetite for growth, but mounting headwinds may prove a challenge.

Resilience in the face of uncertainty

The lingering threat of inflation remains a real source of concern for the middle market. More companies are saying inflation is having a negative effect on their performance, citing the increase in salaries and wages, higher costs of raw materials and doing business, and continued high fuel charges as some of the primary drivers. Most firms continue to pass these increased costs on to their customers, in addition to seeking ways to increase efficiency and productivity.  Technology has been a critical factor in this effort, but also comes with its own set of risks.

Inflation/recession, talent shortage and supply chain are the primary risks called out as being most challenging for the middle market. In addition, areas that are proving most challenging to manage include maintaining revenue levels, maintaining employee engagement and connectivity, and ensuring investment in technology keeps pace with needs.  All these variables present a complex mix of challenges that need to be managed, often with fewer resources than larger companies. As we have seen so often in the past, the middle market typically rises to the task and flexes its resiliency muscle… important trademark of the Market that Moves America!