Daily News: April 23, 2015

Middle Market Company Growth Stabilizes

Following a year of consistently accelerating revenue and employment growth for middle market firms, growth appears to be slowing and stabilizing in Q1/15, according to the National Center for the Middle Market’s Q1 2015 Middle Market Indicator (MMI). The quarterly study found that while revenue and employment growth continue to be strong, the rate of increase has tapered off slightly, especially for payrolls.

Middle market companies, defined as those with revenue between $10 million and $1 billion, account for roughly one third of the total employment status of the U.S. and generate $10 trillion in annual revenue. Despite its relatively low profile, the US middle market is the fifth largest economy in the world.

“Despite its role in creating some 44.5 million jobs in this country, the middle market — much like a middle child — tends to get less attention than small business or large US corporates,” said Thomas A. Stewart, executive director, NCMM, a collaboration between GE Capital and The Ohio State University Fisher College of Business. “In our 13th quarter surveying this vital economic engine, our data show middle market companies expect financial and employment growth in 2015 and into 2016, but at a slower and more sustainable rate than last year. What remains to be seen is whether this is a pause before acceleration resumes or a return to a more normal rate of growth after a rapid run-up.”

Growth Strong but Slowing

Mean revenue growth among middle market companies increased to 7.4% in Q1 2015, one full percentage point higher than what firms reported in the first quarter of last year. All in all, the financial performance for middle market companies once again exceeded the revenue growth for the S&P 500, which was 2.9%.

Sixty-four percent of middle market companies reported improved past-year company performance in Q1, with companies at the high end of the middle market (revenues of $100 million to $1 billion) recording especially strong performance. While this represents a decline from the 70 percent of businesses that cited year-over-year performance improvements last quarter, the proportion of firms reporting deteriorated performance dropped significantly as well, from 8% to just 4%.

While most businesses anticipate future growth, the outlook has dimmed from the previous quarter. At the end of 2014, nearly three-quarters of middle market firms reported expectations for future growth; that number has dropped to 59% for the current period. Mean total growth expectations for the next 12 months have dropped as well, from 6.0% last quarter to 5.3% today.

A Hiring Pullback

With growth expectations slowing, companies have lowered expectations for hiring. About one-third of firms expect to hire in the next three months, and around four in 10 (39%) say they will hire over the next 12 months, down from 52% that reported employment growth intentions last quarter. However, mean total employment growth still remains over 4%, down from the last quarter, but well above the first three quarters of 2014.

Staffing and Security among Top List of Concerns

When asked about what will have the greatest impact on their companies’ performance over the next quarter, middle market leaders cited challenges related to growth and staffing. More than 40 % of business leaders view staffing as a challenge, with retention and talent acquisition being the primary concerns.

Middle market firms also expressed fears about losing customer information and the impact a security breach could have on company reputation. The vast majority — 83% — of companies are at least somewhat concerned about the impact of a potential security breach, while nearly half — 46 % — are very to extremely concerned. Nearly four in 10 companies (38%) say they are increasing cyber security spending. This is especially true among companies between $100 million and $1 billion in revenue, with nearly half of those companies (49%) reporting an increase in cyber security spending.

“Middle market companies are a major driver of the American economy, so it’s great to see them remain confident about the future, even as they face challenges,” said Stewart. “Our data show that most companies plan to continue to invest additional revenue, rather than save their cash, and intend to keep innovating and introducing new products and services this year. While their rate of growth is slowing, it’s certainly not stopping, and most business leaders expect that to continue.”

The National Center for the Middle Market was founded in 2011 in partnership with GE Capital and The Ohio State University Fisher School of Business.