This is the first edition of a quarterly blog post summarizing the economic state of the Middle Market from the standpoint of the NCMMs Middle Market Indicator (MMI), the ADP Employment Report, and other economic indicators. It is produced by Bill LaFayette, Ph.D., owner of Regionomics®, a Columbus, Ohio-based economic and workforce strategy firm.
The broad U.S. economy delivered slightly better - but still relatively weak - output results during the second quarter. U.S. Gross Domestic Product (GDP) increased at an annualized rate of 1.7 percent, versus a significantly downward-revised 1.1 percent gain in the first quarter. (This is a preliminary estimate that will be revised in coming months as better data become available.) Personal consumption - 70 percent of the economy - grew at a 1.8 percent annualized rate, down from 2.3 percent in the first quarter. However, business and non-business domestic investment strengthened markedly. Imports, a deduction from GDP, increased at a faster rate than exports, negatively impacting GDP growth. Government spending continued to decline, but at a much slower rate than during the past two quarters.
Private-sector employment growth, however, slowed slightly. Net employment growth during the quarter, as reported by the U.S. Bureau of Labor Statistics (BLS), totaled 597,000 (0.5 percent) compared to 637,000 during the first quarter and 697,000 during the fourth quarter of 2012. By far the best-performing sector was leisure and hospitality, increasing 204,000 (1.5 percent). Business and professional services added 187,000 jobs, and retail added 86,000 jobs. Other sectors showed relatively little change, but manufacturing experienced small employment losses all quarter, totaling 20,000 for the quarter. Because productivity growth is such a major factor in manufacturing, employment changes are particularly unhelpful in signaling the underlying health of the sector. But the strength of the business services sector is consistent with the strength of business investment in the GDP results, while the outstanding performance of leisure and hospitality - which is driven largely by discretionary purchases - is consistent with improving confidence (discussed below).
The ADP Employment Report offers a unique opportunity to track the relative strength of Middle Market hiring compared to that in the broader economy. The analysis is based on the payroll processed by ADP, and is adjusted by Moody's Analytics to mirror private-sector employment changes reported by BLS. The sample size is 406,000 companies and 23 million employees - more than 20 percent of private-sector employment. Unlike the BLS, employment is classified by company size; the 50 to 499-employee category is used to approximate the Middle Market.
The chart shows the relative employment growth of the Middle Market compared to that of the total private sector beginning in January 2010 as employment was beginning to turn. Employment is graphed on an index basis so the chart shows cumulative percentage growth through the recovery. Over that entire period, Middle Market employment growth has exceeded that of the overall economy. But that advantage has narrowed recently. During the second quarter, Middle Market employment grew 0.3 percent, compared to 0.4 percent for the entire private sector.
The ADP Employment Report also attempts to predict the BLS private sector employment change; each month's employment report is issued two days earlier than BLS. In the July report (included in the chart) total employment grew by 200,000, while Middle Market employment increased 60,000. In other words, the Middle Market contributed 30.2 percent of employment growth - close to the 29.7 percent average for the preceding 12 months, but considerably less than the 49.5 percent contribution during the recovery's first year. Today BLS reported that private-sector employment rose by 161,000, but the ADP estimate is designed to predict the final employment change, after revisions in each of the coming two months.
The MMI reports that growth in the Middle Market during the second quarter mirrored the first quarter, with more than half of companies reporting better performance than last year. Hiring also strengthened. This was consistent with the ADP report: although growth moderated during the past two quarters, the 128,000 jobs added by the Middle Market during the quarter was far better than the 73,000 during last year's second quarter.
The overall confidence of Middle-Market executives in the broader economy at all levels improved in the second quarter. The percentage of executives who were at least somewhat confident was 79 percent in their local economy, 63 percent in the U.S. economy, and 48 percent in the global economy. Each of these was a higher reading than last quarter. Confidence in the global economy was particularly improved over its level of only 22 percent one year ago, when European fiscal crises were dominating the headlines. This improved confidence is reflected in firming hiring plans over the coming 12 months.
This growing confidence is consistent with consumer sentiment indices; executives, after all, are also consumers. The Thomson Reuters/University of Michigan Consumer Sentiment Index during the early June field period for the MMI survey was 82.7, substantially higher than its early March reading of 71.8. The index has subsequently risen to a six-year high of 85.1.
The economics community is voicing some degree of confidence as well. The average forecast of the more than 50 economists polled by the Wall Street Journal in July called for gradually rising GDP growth through the second half and the first half of 2014 -- rising from an average forecast of 2.4 percent growth in the third quarter to 2.9 percent in the second quarter of next year. That is still not especially strong, but when asked to predict the likelihood of a recession in the next 12 months, the average chance was a very low 13 percent. Also, a majority of economists (54 percent) thought that the economy in the coming year is more likely to be stronger than they are expecting rather than weaker.