By every current measure, middle market business is good. Revenue
is rocking, having risen 8.6% in the last year. Thirty-five percent of
companies expanded into new domestic markets last year, and 41%
expect to do so next year, reflecting their 88% level of confidence in
the U.S. economy. Job growth is an impressive 6.4%, as the middle
market continues to show that it deserves the most credit for the
steadily falling U.S. unemployment rate.
There are devilish details, of course. Here are three of them:
Tariffs
Executives in all industries say tariffs will hurt their business (see
Spotlight), but some will suffer more than others. Protecting U.S.
manufacturers is the ostensible purpose of border taxes, but more of
them say they will be hurt than helped. Some subsectors, like steel,
stand to benefit from protectionism, but more, like manufacturers that
use steel, are likely to suffer. Majorities in many industries forecast
rising costs: 89% among wholesalers, 62% of construction companies,
the same percentage of manufacturers, and 56% of retailers. They will
impose price increases in almost the exact same measure.
Costs aren’t the only bite. Executives also predict substantial disruption
of commercial relationships—in those four industries, between
42% and 50% will seek new suppliers or renegotiate terms. Among
wholesalers, retailers, and manufacturers, similar percentages say they
will pursue new customers or strike new terms. For some companies,
these disruptions may be more significant than the costs themselves.
Relationships ruptured may not all come back; for example, American
soybean growers fear customers they have lost in China will be gone
forever, as buyers find supplies in Brazil and elsewhere.
Government
Government is weighing on executive minds for reasons other than
trade policy; in this quarter, 25% named government among their
top challenges, not counting those who are concerned about trade.
Uncertainty and the general sense of political disorder seem to be the
culprit, as one executive told us, “The political environment is a major
distraction that makes planning difficult.”
Costs
The number of executives who listed costs as a top challenge dropped
last quarter from 26% to 19%, but is still up from 14% a year ago. In
particular, health care costs are cited as a primary concern. Energy and
interest costs are up. Full employment and increases in minimum wages
by big companies might put pressure on labor costs. Indeed, 48% of
executives say they will offer more pay to retain people—up from 38% at
this time last year.
Of course, costs are just the subtrahend of the equation. The minuend
is revenue, and the difference is profit. We have been doing that math
for years. For the last year, the difference has been narrowing, and this
quarter—for the first time in more than five years—executives say costs
will go up more than margins.
Amid all this, however, middle market executives say that their biggest
challenges are the core business issues of maintaining growth and
beating competitors. And the numbers show that when it comes to
meeting those challenges, they rock.
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