June 26, 2013 Acute Problems

Volume 16 | Issue 5

Yes, the latest Middle Market Indicator shows there are encouraging but reversible signs of growth throughout the sector. However, several l

The good news is that the American middle market continues to outpace executive’s projections in both revenue and employment figures. The bad news is that arguably its most critical sector – manufacturing – continues to lag behind in both categories.

This is according to results stemming from the latest Middle Market Indicator, a survey of 1,000 middle market executives by the National Center for the Middle Market (NCMM). Overall, according to the survey, the middle market, which is made up of nearly 200,000 American businesses, saw a 5.8-percent increase in revenue and a 2.2-percent increase in employment growth in 2012.

For the year ahead, two-thirds of middle market leaders expect their firm’s revenue to increase and more than one-third expect to add jobs. This would continue a developing trend of late in the so-called middle market, which added 2.2 million jobs while larger companies slashed more than three million during the Great Recession.

Officials say these results increasingly show willingness by the sector to maintain growth through the turtle-paced economic recovery via additional investments in technology and innovation.

“We must not take the remarkable resilience of middle market growth for granted,” says Dr. Anil Makhija, Director of the National Center for the Middle Market, which is a partnership between The Ohio State University’s Fisher College of Business and GE Capital.

“While the sector continues to outperform both its own expectations and national economic growth rates, the prospect of increased costs related to health care or tax increases could hold back this positive trend,” Makhija says. “It’s surprising that, given the middle market’s potential for significant growth, policy initiatives in Washington are rarely viewed through this sector’s lens.”

Mike Pilot, chief commercial officer of GE Capital, echoes those sentiments.

“The positive growth stories we hear from the middle market every day provide reason for optimism,” he says. “These businesses are making investments in the people and technology that create new and sustained growth for the future. Yet the challenges they face are acute and merit our attention. This is why we partnered with Fisher to better understand and serve the needs of this segment.”

WORRIES REMAIN
These challenges, officials reported in the survey, are specifically tied to taxes, healthcare, and regulation. In other words, the prospect of additional costs to doing business could very well lead the overall middle market sector to significantly cutback in hiring and investment.

Survey results show that 89 percent acknowledged the cost of doing business or uncertainty about government action as key challenges, and 91 percent indicated they would impose a hiring freeze, decrease investment, or reduce employee benefits.

Healthcare costs, as usual, topped the list of severe middle market challenges, with more than half reporting that the rising cost of healthcare will negatively affect their business. This is not a shocker, Makhija says. Since the NCMM’s inception, and on the heels of full implementation of the Patient Protection and Affordable Care Act (PPACA), at least 90 percent of respondents have stated that healthcare costs and uncertainty over healthcare regulation are among their greatest worries.

MANUFACTURING LINGERING BEHIND
These challenges are no greater than in the American manufacturing sector, where revenue and employment figures continue to drag their feet, Makhija tells Industry Today.

Makhija says that manufacturing grew just 4.1 percent in 2012, 1.7 percent less the middle market sector overall. Furthermore, job growth was just 1.4 percent, far less than the 2.2 percent the sector as a whole reported.

Approximately 16 percent of respondents were in manufacturing, Makhija says. That ties services for the largest percentage surveyed.

In addition to rising labor and healthcare costs and never-ending regulation fine-tuning, manufacturing is also going through a much more severe version of a problem that is plaguing the middle market sector all together: There are not enough qualified workers.

Simply put, there is an acute skills gap – and there is enough proof to imply that the problem won’t correct itself anytime soon.

About 76 percent of surveyed executives cited the ability to retract, train, and retrain talent as a top challenge. Additionally, one-third reported a skills gap in their regional economy, particularly in the manufacturing sector, followed by the retail trade.

Makhija says 37 percent of the middle market reported difficulties filling vacancies with well-qualified workers. In manufacturing alone, that figures intensifies to 48 percent, Makhija says, and that number could be greater in the months and years to come.

“For some reason, in our country, and for some time now, there has been a deemphasizing of basic STEM (science, technology, engineering, and math) skills, which are important for advanced manufacturing, the potential future here,” he says. “Skills are produced by society, and firms can only do so much in terms of their training programs.”

Makhija says survey respondents stated the following challenges in employment:

• Finding the right sources of talent;
• Lack of workers with relevant experience;
• Lack of workers with relevant training;
• Workers cannot meet company’s expectations;
• Workers not prepare for company culture;
• Lack of workers with relevant education.

Our greatest asset, says Makhija, is being the constant frontrunners in advanced manufacturing, which he says involves advanced skills that the American education system simply is not emphasizing anymore.

In order to change this, respondents suggested dynamic curriculum changes be made in secondary and post-secondary institutions. Boosting the waning popularity in vocational training will be another plus.

WILL IT HAPPEN?
“I’m cautiously optimistic,” Makhija says. “I believe people are realizing how important these skills are and how important manufacturing is to the sustainability of the middle market and the economy as a whole. But, of course, it is not one of those problems that can be solved overnight, and it may not happen as quickly as we would like.”

The National Center for the Middle Market (NCMM) was founded in 2011 in partnership with GE Capital. It is located at The Ohio State University’s Fisher College of Business. The Center is a leading source of research on the US middle market economy.

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