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REPORT: Middle Market Companies Post Solid Revenue Gains. Signals Economy Continuing to Improve

U.S. middle market companies posted solid revenue gains and added workers in the second quarter of 2013 – trends expected to continue in the next 12 months – sending a clear signal that business conditions for the segment have stabilized and serving as an indicator that the overall economy continues to improve.

Middle market companies, defined as those with annual revenues of $10 million to $1 billion, reported sustained increases in revenue and employment during the period, reversing declines seen earlier in the year. Stabilizing top-line growth and increased employment are fortifying optimism. Middle market executives increasingly feel confident about prospects for global, national and local economic activity. As a result they expect revenue growth to continue and they expect to add jobs in the next twelve months at a more rapid pace.

The gains in revenue, employment and confidence among this group could prove to be a harbinger for a broader economic rebound. The middle market serves as a critical engine for the U.S. economy, accounting for approximately one-third of non-government GDP and more than one-of-three domestic jobs. Middle market revenue increases of 5.8% for the first half of 2013, and expectations for greater than 5% increases for the next 12 months, far outpace analysts’ 1.2% revenue growth estimate for the S&P 500 Stock Index, underscoring the importance of these businesses.

Despite strong performance and forecasts, challenges remain. Healthcare policies mandated by new legislation are chief among the concerns of middle market managers. The group also cites concerns about other government regulations and finding the right workers, a gap in skills that is preventing them from adding even more jobs. There has been little improvement in the severity of these concerns in recent quarters.

There is little middle market companies can do to solve these lingering issues – but if they are resolved, growth can accelerate at a more significant pace. In part, that’s because middle market companies now report a 2-1 margin in their willingness to invest cash, an increase from a year ago.

Company performance continues positive momentum

Revenue growth continues as 65% of middle market companies reported positive gross revenue performance during the past 12 months. That’s up marginally from 63% in the first quarter of 2013 and 62% in the second quarter of 2012. The mean revenue growth remained static at 5.8%, with the core of the middle market – those businesses with between $50 million and $100 million fueling much of the gains. Manufacturers reported strong growth, offsetting sluggish results in the retail sector. Companies also expect performance in the coming year to improve with 65% projecting revenue to grow, up from 64% in the previous quarter. Further, these companies expect increases to be bigger – a 5.1% growth rate, up from expectations of 4.9% growth in the first period of 2013.

Employment growth expected to continue

In the second quarter, there was a significant rise in the percentage of middle market companies reporting an expectation to add jobs in the next 12 months, with 43% of companies anticipating adding workers in the year ahead, up from 38% in the first quarter. That marks a 13% gain in the number of companies looking to expand. In addition, these companies plan on ramping up their hiring to a 2.5% clip, almost one-fifth ahead of the 2.1% gain they had forecast in the first quarter of the year. Employment growth expectations are dispersed across the middle market with all industry sectors anticipating adding workers during the year. Larger middle market companies forecast that they will add the most workers – those companies that have at least $100 million in revenue projecting mean growth increases of 3.3%, up from 2.2% in the year earlier period.

Confidence is rising steadily

Companies are becoming more confident in the global, U.S. and local economies. Almost half of surveyed companies say they are at least somewhat confident in the global economy, more than double the 22% that reported similar sentiments a year ago. Almost two-thirds of respondents said they are at least partly confident in prospects for the U.S. economy, up from 50% a year earlier. And a resounding 79% of companies are confident or somewhat confident of their local economies, up from 67% a year earlier. Confidence is growing across middle market companies of all sizes. Executives in services, manufacturing, wholesale trade and construction businesses were especially optimistic about global prospects, while service industry executives fueled confidence gains in the U.S. economy.

Capital investment poised to surge

Middle market companies are sending a strong message that they are poised to invest capital to add jobs, equipment, make acquisitions or train employees – signaling continued growth. The percentage of company executives who say they will invest rather than hold extra cash on hand increased from 51% a year ago to 64% in the second quarter of 2013. This trend correlates with increasing confidence and stems from the stability of their revenue and employment base.

Challenges persist

The impact of healthcare legislation continues to be the main concern among middle market executives of companies of all sizes. Despite a delay in the implementation deadline as the new legislation approaches, companies remain unclear as to its impact. Uncertainty over other government actions and the ongoing ability to grow revenue and maintain margins also continue to rank among the leading concerns of middle market executives.

The survey is conducted by the independent research firm RTi on behalf of the NCMM. For the full report, click here.