How’s Business?
One question on the Middle Market Indicator survey asks executives whether their company’s overall performance has improved, deteriorated, or stayed the same in the last year. This quarter, the ratio of companies saying their performance was better to those who felt it had weakened was approximately 12 to 1. When the MMI was launched in April 2012, that ratio was approximately 5 to 1; furthermore, over the six-year history of the MMI, the average ratio has been 8 to 1. By this point, the economic tide has lifted just about every boat.
Past performance is no guarantee of future results, as the saying goes; but given this long period of growth, it is no wonder that
middle market leaders feel more confident about the economy than they ever have. It has been nearly a decade since they have faced headwinds from the economy. But while they are benefiting from good conditions, it is worth reflecting on some smart things middle market leaders are doing to make things even better for themselves and their companies. Although midsize companies, especially those in the lower middle market, are susceptible to buffeting from economic conditions, we continue to see evidence of sound management bolstering performance.
They’re investing in talent. Half of middle market leaders state talent is their company’s number-one long-term challenge, and by an eight-to-one margin they say that labor market conditions will tighten over the next few months. The lower the number of people looking for jobs, the more important it is to train and retain the talent already in place. In 2015, just 26% of executives said they would increase their investment in workforce training and education. In 2016, that rose to 30%. This year, it jumped to 38%. During the same period, the number saying they would use wage increases as a retention tool is unchanged at 43%.
They’re moving into new territories. Until 2017, the number of executives who said their company had expanded into a new domestic market in the previous year had never exceeded 33%. But in the four MMIs of 2017, those numbers were 36%, 38%, 36%, and 36%—a meaningful increase. As for international business, while the middle market remains overwhelmingly domestic (87% of sales come from the U.S.), those with international operations report strong expansion, with 45% reporting increased sales and just 4% reporting declines.
They’re getting innovation to market. Middle market companies invest roughly 8% of revenue in R&D—a percentage that has remained consistent, though of course the absolute dollars increase as revenue does. There is a change at the other end of the R&D pipeline, however. This quarter, 41% of middle market executives say they expect the proportion of revenue from new products to increase next year, while 57% say it will stay the same and 2% that it will decline. But two years back, just 31%
thought new products’ share of revenue would increase, with 66% forecasting no change, and 3% a decline. Whatever the cause or causes might be, it is clear that the middle market is making more of its R&D investment than it did.
They’re minding the store. MMI data contain little evidence that executives are letting their very high confidence in the economy translate into untoward exuberance in their behavior. The trend line for companies taking on new debt is as flat as Florida. Capital spending is up only a bit. More companies are holding increased inventory than were at this time a year ago--but more companies are also holding less inventory.
The overall picture is one we have seen before: Middle market companies move quickly when they see an opportunity, but not
before they feel sure of it, and prefer to pay as they go. It is a formula that has produced economy-leading results for middle market companies, and seems likely to serve them well whatever the coming year brings.