Confidence and revenue were high among middle market executives, but growth was down from the previous quarter
Nearly 80% of middle market companies reported that their revenue has increased over the past year, the highest percentage ever, according to the 4Q 2018 Middle Market Indicator by the National Center for the Middle Market.
Even so, the rate of growth is down quarter to quarter, from 8.6% in the third quarter to 7.9% in the fourth quarter. This decline is driven by upper middle market companies in sectors such as services and finance.
“The retail trade and construction industries report notable increases in the rate of revenue growth this quarter, and manufacturing continues to report strong growth,” the report authors write. “Despite the overall drop, revenue growth is higher than one year ago and remains a full point above the MMI average revenue growth rate of 6.9%.”
In 2019, 60% of middle market companies expect that their revenue will continue to grow. On average, middle market executives expect to grow at 5.9% this year. Most (89%) middle market leaders also feel confident about their own local economies in 2019, but their confidence in the global economy fell from 80% in the third quarter to 73% in the fourth quarter. Confidence in the national economy stayed above 85% throughout 2018. Despite all the changes, NCMM reports that all confidence metrics it measures—local, national, global—when taken together “remain well above the averages recorded by the MMI over the past seven years.”
Thomas Stewart, executive director of the NCMM, says that confidence in the middle market is always similarly weighted—local economy is most important, then national economy, then global.
“This is because middle market companies are deeply rooted in local economies; they know them best,” Stewart says. “They are more confident, perhaps the same way a person walks more confidently in a neighborhood he knows than in one he visits less often.”
One problem area for the middle market may be employment growth. While growth remained solid (55%) across 2018, the rate of growth has declined for the past two quarters, NCMM reports. In the third quarter, growth was 6.4%; it fell to 5.4% by the end of 2018.
“While the data suggest that the rate of employment growth may have peaked for the time being, middle market companies are still hiring: Only one in 10 firms reports a decrease in headcount compared to last year,” the report says.
Despite this, expectations for growth have fallen—43% of firms say they will increase their workforce in 2019. Companies project that employment will grow 3.8% in the next 12 months, down from 4.6% in the third-quarter of 2018. Larger middle-market companies have higher expectations; they expect a 5% growth in employment in 2019.
In response to an NCMM question about short- and long-term concerns, middle market leaders say that they’re most concerned with maintaining growth over the next 12 months—many executives wonder how they can attract and retain the best employees. In the next three months, middle market executives worry most about costs associated with imports, exports and tariffs.
“There are several issues with the global economy: slowing growth in China, Brexit anxiety and—clearly—trade war issues,” Stewart says. “You can see in the last [Middle Market Index] that we put a spotlight on tariffs and their impact. Tariffs and uncertainty about the future direction of trade policy would both reduce global confidence.”
While middle market confidence is down, with challenges that appear “more diverse and more daunting,” middle market executives still want to invest in innovation, open new markets and build new facilities. If these middle market executives are seeing warning signals in the economy, NCMM says that they aren’t yet slowing down.