Executive Summary: Q3 2013 Middle Market Indicator
U.S. middle market companies extended their string of solid revenue and employment gains during the third quarter of 2013 and anticipate those trends will continue over the next 12 months, albeit at a decelerating pace. Though markedly improved from the same period a year earlier, revenue increases, employment gains and confidence in the global and local economy all appear to have hit plateaus.
Almost two of three middle market companies - defined as those with annual revenues between $10 million and $1 billion - reported improved company performance. Overall revenue increased 5.5% in the third quarter, which matches gains in the third-quarter of 2012 but marks the slowest rate of increase over the past four quarters. Employment also grew with four in ten companies expanding their workforce. Employment at middle market companies increased 2.8% in the quarter, a marginally higher pace than that of the past four quarters.
Prospects for future growth - while up significantly from a year ago - have moderated over the past three months as middle market executives face strong headwinds both at home and abroad. Concerns about impending health care and other regulation on the domestic front, destabilization in the Middle East, and some economic turbulence in former fast-growing markets (India, Brazil and Turkey, among them) are giving middle market leaders pause, and could lead to more restrained hiring and spending.
Middle market companies anticipate that revenue will grow 4.4% over the next year, a sharp drop from the 5.1% estimated growth in the prior quarter. That would represent the first time in more than a year that top-line growth would dip below 5% for the segment.
The recent results and tempered growth outlook still outpaces by nearly two-fold the performance of the broader market - underscoring the middle market's critical role as an economic driver. Analysts anticipate a 2.6% increase for the S&P 500 Stock Index in the third-quarter (down from 3.0% estimated at the end of the second quarter). And analysts expect revenue gains for the S&P 500 during the fourth quarter to be a scant 1.0%.
A significant proportion of middle market executives continue to express confidence in local, national and global economic conditions - though the steady gains in confidence have come to at least a temporary halt. The most severe factors that are muting company confidence largely, if not entirely, are geo-political in nature, over which these companies have little sway. If these issues are resolved, growth might accelerate at a more rapid clip. In the interim, though, fewer middle market companies anticipate introducing new products or services or adding plants or facilities.
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