At a rate of 5 percent, the U.S.’s middle market sector grew revenue five times faster than the rate of the S&P 500, a recent analysis shows.
What’s more, manufacturers within the sector fared a smidge better, growing 5.1 percent during the same time, according to the latest Middle Market Indicator, a quarterly poll of 1,000 executives from companies with revenues ranging from $10 million to $1 billion.
And employment in the middle market sustained a 2.5 percent growth, faster than small and large firms, says Anil Makhija, director of the National Center for the Middle Market, which published the survey in collaboration with The Ohio State University and GE Capital.
Manufacturing employment throughout the middle market grew 2.2 percent, Makhija tells Leo Rommel of Industry Today.
In total, mid-sized firms – which now contribute a third of non-government U.S. GDP and account for 44.5 million jobs, or a third of total of U.S. employment – created 1.2 million jobs last year, the report says.
“The middle market is the true engine of the nation’s economy and continues to deliver consistently strong performance during both recessionary and growth periods,” Makhija says. “That this sector grew revenue five times greater than S&P 500 companies demonstrates the capacity of this agile sector to contribute to the broader economic recovery, but there is still work to be done to eliminate artificial barriers preventing this sector from firing on all cylinders.”
Those barriers, the survey says, include continued government uncertainty and ongoing concerns over compliance with certain federal regulations, all of which are moderating the segment’s outlook for 2014, which projects 4.3 percent revenue and 2.2 percent employment growth over the next 12 months.
Manufacturing within the middle market sector will also see similar numbers in both categories. Revenue growth will dip to 4.6 percent and employment growth will inch up to 2.3 percent.
The middle market altogether could add up to one million jobs to the U.S. economy in 2014. While this outpaces national growth trends, the middle market would create 200,000 less jobs than last year at this rate.
That’s reason for concern, Makhija says. “For starters, enduring uncertainty over federal policy must finally be addressed,” he says.
But it doesn’t stop there.
WHY IT’S UP TO THE GOVERNMENT
What seems largely ignored in the national conversation about economic growth and job creation is the role of the nation’s mid-sized companies.
It’s often overlooked that this sector added 2.2 million jobs during the Great Recession. In 2013, these companies created 70 percent of all new jobs, Makhija says.
But this sector remains in danger of seeing its well-reported growth derailed by the federal government, which is reportedly viewed as a barrier rather than an enabler of growth.
In fact, 52 percent of mid-market executives believe that government uncertainty is stifling economic growth and 58 percent say federal policy uncertainty has impacted their business planning. As a result, 63 percent of mid-sized firms have discouraged hiring and 56 percent report decreased likelihood for capital investment. Furthermore, 63 percent of respondents say they expect to see reductions in business expenses for travel, bonuses, and incentive pay.
This data should make it very clear to policymakers that continued uncertainty has real consequences on this segment of the economy and economic growth nationwide, Makhija says.
“Federal action – or a lack thereof – has economic impacts far beyond the beltway,” Makhija says. “The consequences are borne out in the ability and willingness of mid-sized firms to hire new workers, invest in their businesses, or expand into new markets.”
This especially includes manufacturers, he adds.
“The question is what the impact of government policy on business is. That’s the issue,” he says. “And basically respondents are saying, in various ways, that government policy is having a negative impact throughout their business and their industry.”
Makhija says 87 percent of manufacturing respondents say that government uncertainty is stifling growth.
NEEDED: MORE BUSINESS-FRIENDLY TAX INCENTIVES
Creating a business-friendly environment should also remain a top governmental priority, Makhija says.
“When policymakers commit to creating a business-friendly climate, the capacity for middle market companies to grow is unleashed,” said Makhija.
For instance, more than 80 percent of middle market executives in Texas have realized the benefits of tax incentives for capital investment and business growth, according to the survey. It’s no wonder then, that 73 percent are satisfied with the state’s business climate.
But this isn’t the case in every state, however. Just half of middle market executives in Ohio were satisfied with the business climate. This rate dropped to 34 percent in California and 20 percent in Florida.
When it comes to federal policy, middle market executives assert that high corporate tax rates and a lack of tax incentives are impeding their growth. Nationally, 42 percent of middle market executives say that corporate tax rates are too high and, as a result, have a significant negative effect on their business.
This is even truer in the middle market’s manufacturing sector, Makhija says, where about 76 percent say there aren’t enough tax incentives for middle-sized firms to invest in facilities or product development.
Moreover, 71 percent of manufacturing respondents say there are not enough tax incentives to hire new workers.
In addition, as the government approaches its current debt ceiling, executives continue to express more concern that a government default would increase interest rates for their business and reduce consumer and business confidence.
ALSO NEEDED: REGULATORY RELIEF
According to the survey, 77 percent of mid-market firms are required to follow federal regulations. These firms spend 8 percent of their workweek as well as 8.3 percent of annual revenue on out of pocket costs to ensure compliance with regulations.
Moreover, 6.3 percent of firms have to outsource expertise to understand the regulations.
“Mid-sized firms can’t afford to absorb these costs like big firms, nor do they enjoy exemptions like smaller firms, so they are caught in the middle to shoulder the burden,” Makhija says.
Middle-market manufacturing respondents echo these sentiments.
Makhija says approximately 77 percent of manufacturing executives – who make up about 18 percent of the survey’s responses – say that “government regulations are unfairly burdensome to middle-sized firms like mine.”
HEALTH CARE WOES
Middle market executives continue to identify health care costs as a top pain point for their businesses.
According to a report released by the Columbus, Ohio-based National Center for the Middle Market in November, 90 percent of mid-sized firms believe the ability to provide health care is important to their companies’ recruitment and retention efforts, and just 23 percent would consider dropping coverage for their employees.
Instead, mid-sized firms have turned to innovative delivery solutions to reduce costs while improving outcomes for their employees.
According to the report, solutions most frequently implemented by these firms fall into four categories:
- Implementing wellness programs;
- Providing on-site or remote health care;
- Sourcing lower cost health care;
- Analysis of health care data.
Manufacturers in the middle market sector are implementing many of these same solutions, Makhija says.
“With the majority of the nation’s 200,000 middle market companies family owned or privately held, it comes as no surprise that 80 percent of the middle market executives we surveyed view health care as a company responsibility to employees,” he says. “What’s more, 85 percent of the executives asserted they take pride in offering quality care for the people they employ and their families.”
Without the scale of large companies or exemptions afforded to small companies, mid-sized firms are in a particularly challenging position to adjust to both rising health care costs and the cost associated with implementing new regulations, Makhija adds.
“But in spite of these challenges, these companies are neither fixated on Washington politicking nor are they planning to drop health care coverage for their employees,” he continues. “Rather, middle market executives are embracing innovations that are simultaneously reducing business costs and improving health care outcomes.”
WORKFORCE CONCERNS REMAIN
A report released recently jointly by the National Center for the Middle Market and the National Association of Manufacturers indicates that the 47 percent of mid-market manufacturers who use advanced manufacturing techniques have experienced a 20 percent profitability increase over the last five years.
These companies are most frequently leveraging automation as well as computer, process, and information technologies.
This, obviously, is good news.
But the report also reveals a startling skills gap in the American workforce causing job openings to go unfilled.
Among users, 93 percent report a skills deficiency and 74 percent of users report deficiencies in science, technology, engineering and math. Users also identified inadequate technology and computer skills, a sever lack of technical skills, and inadequate math skills as top recruitment challenges.
This, of course, is not groundbreaking news for the American manufacturing sector – small, medium, or large. It’s a dragon it has been trying to slay for years.
“With three in four middle market manufacturers looking to hire, and 52 percent of advanced manufacturing users and 47 percent of non-users reporting unfilled positions, it’s obvious that a glaring mismatch between skills and jobs is holding back growth,” Makhija says. “Through a renewed focus on training and collaboration with education institutions, more mid-market manufacturers may be able to break past this artificial barrier, but there must be a concerted effort to change the status quo if we are to reap the benefits that advanced manufacturing has to offer.”
Chad Moutray, Chief Economist for the National Association of Manufacturers, agrees.
“Mid-market manufacturing growth reflects the new manufacturing – a sleek, technology driven sector with exponential power to drive the economy,” Moutray says, in a statement. “However, these positive steps have made a skilled workforce more important than ever.”
In fact, he says 600,000 manufacturing jobs remain unfilled due to employers’ inability to find skilled workers.
“As a result, efforts to improve STEM education and enacting comprehensive immigration reform are essential to closing the skills gap and continuing this trend of growth in mid-market manufacturing,” Moutray says.
Even more startling, Makhija says, is that 61 percent of manufacturing respondents in the aforementioned Middle Market Indicator say that current education policies do not focus on the kinds of skills that nearly all manufacturing firms need.
“Workforce problems are particularly important because manufacturers are looking for advanced-manufacturing techniques,” Makhija says. “They need people with STEM skills.”
CONFIDENCE IS UP
Still, despite the avalanche of above-mentioned concerns, there has much more of a marked change in terms of confidence over the last year, according to the survey.
“That means there is a greater level of confidence in both the global and domestic economy,” Makhija says. “To give you a sense of that, 57 percent of respondents say that they have some confidence in the global economy. That’s more than half. And for the U.S. economy, the number is 65 percent – close to two-thirds of respondents. That’s pretty serious.”
He adds: “People are showing confidence in the U.S. economy and that jives well with what you might have otherwise heard with GDP growth supposedly picking up in the coming year.”
Let’s turn to the question of investment. In the survey, respondents were asked: If we gave you an extra dollar, would you invest it? About 64 percent replied yes.
“That’s pretty good,” Makhija says, putting it into context. “That means only 36 percent of them don’t have enough confidence to invest. They’ll either hold it as cash or put it in short-term security.”
Manufacturers in the middle market sector feel equally confident, Makhija says, adding that 61 percent feel “some sort of confidence” in the U.S. economy and 57 percent say the same for the global economy.
“Now that, of course, raises the question as to why the middle market is trending down a bit,” he says. “To me, it is trending down but it is way beyond better than other segments, small and large businesses.”
He adds: “You can have a tremendously improving economy even while the middle market going down because the middle market is still way outperforming the other segments, and we expect that to go on.”
About the National Center for the Middle Market
The National Center for the Middle Market (NCMM) was founded in 2011 in partnership with GE Capital and is located at The Ohio State University’s Fisher College of Business. The Center is the leading source of research on the U.S. middle market economy.
Over the past three years, the Center has awarded 25 research grants, engaged more than 300 undergrad and MBA students to learn about middle market companies and connected with more than 3,000 business executives to learn more about this segment.
About GE Capital
GE Capital is one of the world’s largest providers of credit and expertise. For more than 1 million businesses, GE Capital provides financing to purchase, lease and distribute equipment, as well as capital for real estate and corporate acquisitions, refinancings and restructurings. GE Capital is a leader in a number of industries, from airlines, healthcare and energy financing to fleet, franchise and middle market corporate finance. For approximately 60 million consumers, GE Capital offers credit cards and retail sales finance programs. GE Capital is an extension of GE’s rich heritage of building and supporting growth, providing customers with insight, knowledge and expertise in addition to financing.