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Mid-sized firms are expected to add more than 1.25 million jobs in 2013, a recent study finds. That would account for seven out of every 10 new jobs created in 2013.

And nearly 200,000 companies representing the U.S. middle market grew revenue at a commendable 5.5 percent over the last 12 months, more than double the rate of S&P 500 companies.
That’s the good news stemming from the National Center for the Middle Market’s (NCMM) latest Middle Market Indicator, which defines the middle market as businesses with annual revenue between $10 million and $1 billion. There are nearly 200,000 such firms.

But the troubling news is that while annual growth trends are positive, the quarterly report exposed a distinct moderation in quarterly gains as well as in employment, revenue, investment, and confidence growth projections in the year ahead.

In fact, the employment outlook over the next 12 months fell by 180,000 between the second- and third-quarter reports, with middle market companies expecting to add about 900,000 new jobs.

“I would summarize the findings as two-fold,” Dr. Anil Makhija, Academic Director at NCMM, tells Leo Rommel of Industry Today. “One is that the middle market continues to be the engine of growth, but that the engine is a bit challenged. There is some softening moving forward.”

A number of factors – including a skills shortage, changing regulations, and doubt in the government – are triggering this noticeable slowdown, officials say.

IMPORTANCE OF THE MIDDLE MARKET
The U.S. middle market contributes one-third of non-government U.S. GDP, according to the analysis. It also accounts for 44.5 million jobs – about a third of total U.S. employment.

“Employment grew by 2.8 percent in the middle market over the last 12 years, a faster rate of job growth than the small or large markets,” Makhija says. “The small grew 1.8 percent and the large by 2.4 percent.”

And between 2007 and 2010, U.S. middle market firms created 2.2 million jobs despite the record-setting turbulent winds that shook the economy. During the same time, large corporations cut more than three million jobs.

Furthermore, the mid-market has continued to outperform large corporations in job creation, with more than two million new jobs created between 2010 and 2012, Makhija says.

“Middle market companies defy even their own expectations on performance,” he adds. “This is a dynamic group of companies that continue to lead the U.S. economic recovery, but whose growth is stalling in light of the recent government uncertainty.”

A MORE SOMBER FORECAST
Looking ahead, Makhija says the middle market’s growth in a number of key areas will begin to taper off.

For instance, the expected rate of growth of revenues in the middle market is only 4.4 percent for the upcoming year. While employment in this sector grew at stable rate of 2.8 percent in the third quarter, executives predict slower employment growth of 2.1 percent in the year ahead.

Meanwhile, the percentage of middle market executives willing to invest an extra dollar decreased from 64 percent in the second quarter to 61 percent in the third quarter. The figure had been rising the previous six quarters, Makhija says.

Finally, the percentage of middle market managers expressing some confidence in the local and regional economy – which Makhija regards as the main hub of operations for middle market firms – dropped from 79 percent in the second quarter to 77 percent in the third quarter.

“You see that all those numbers are dipping down,” Makhija says. “You could say that some of those changes are not dramatic, but certainly all these figures together signal softening in the market, which seems to be peaking out. These are unflattering stats.”

UNCERTAINTY REIGNS
The greatest trigger of the apparent slowdown, Makhija suggests, is uncertainty – man-made uncertainty that weighs heavily on investment and growth.

We’re talking about uncertainties triggered by the fiscal cliff, sequestration, health care regulations, debt ceiling concerns, and the on-again, off-again threat of a government shutdown.

According to the report, a default by the U.S. government on its debt on account of a failure to relax the debt ceiling is the latest potential problem. The current interest rate on U.S. 10-year Treasury bonds is about 2.7 percent, meaning we’re financing the operations of the U.S. government at very favorable rates.

But Makhija warns that a default would surely raise these government interest rates with an impact on other rates, as a result increasing interest costs for businesses while reducing consumer confidence, foreign direct investment, and creditworthiness. He said it would also shake the confidence of those around the world that have financed U.S. deficits.

“There has been a lot of uncertainty, which of course makes it hard for some to invest into,” he says.

At the same time, he says manufacturers within the middle market have an additional worry: plugging the industry’s widespread and still-not-greatly-improved skills gap.

Makhija says 23 percent of the middle market reported difficulties filling vacancies with well-qualified workers. In a related study, that figure intensifies to 52 percent for unfilled positions requiring advanced manufacturing skills, Makhija says. More than 15 percent of Middle Market Indicator respondents were in manufacturing, he says.

“Manufacturing, more than the overall general middle market, is affected by the workforce problem, and this is in a country with an overall unemployment rate well above 7 percent,” he adds.

The right talent, according to respondents, includes those with relevant experience, training, and education. The nation’s decades-long habit of not putting enough emphasis on STEM skills is biggest trigger for the workforce dilemma, Makhija says.

“The middle market, as a whole, is doing well, at least when compared to other segments,” Makhija says. “But growth may have hit a plateau, and the sector will need the help of many within the government to continue powering this economic engine.”

About the National Center for the Middle Market (NCMM)
The National Center for the Middle Market 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.

Volume:
11
Issue:
11
Year:
2013













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