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Middle Market Confidence Wavers Under Rising Costs, Trade Concerns

July 27, 2018, 07:38 AM
Filed Under: Economic Commentary

Growth in the middle market remains strong, but cracks are beginning to appear in the optimism that’s been driving this unprecedented growth streak. Data from the 2Q 2018 Middle Market Indicator (MMI) released by the National Center for the Middle Market (NCMM) shows that the year-over-year growth rate of 7.4 percent is still higher than past years’ averages. However, that number has dipped for the first time since mid-2017, with larger wholesale and retail middle market businesses showing the steepest declines.

There has also been a drop in economic confidence overall, but particularly confidence in the global economy - which fell nearly 10 percent, from 82 percent last quarter to 75 percent this quarter. More business leaders are reporting concerns over the cost implications of tariffs, jumping six percentage points and reaching its highest level in the past three years. Wholesalers are most anxious about the trade conflict, with one in three fearing the impact it will have on their business.

“Rising costs have been a slowly growing concern for middle market companies for the last year or two - primarily driven by employee wages and benefits. But we’re now seeing that worry over the costs tariffs will impose on businesses is rising sharply and starting to take a toll on confidence,” said NCMM Executive Director Thomas A. Stewart. “What we know from our middle market growth model is that economic confidence influences more than 30 percent of overall company growth, so it would be unsettling if this turns out to more than a dip, especially given the middle market’s critical role in driving America’s economy.”

As of the second quarter of 2018, these signs have not dampened the current positive outlook: 43 percent of middle market businesses report an average 12.3 percent increase in orders, higher than a year ago and the highest ever recorded. Hiring also remains strong – nearly six out of 10 middle market companies (57 percent) say their workforce is larger today than it was a year ago, having grown their headcount by 6.7 percent; almost half (46 percent) expect to increase their workforce in the year ahead.

“We’re still seeing a really resilient and strong middle market sector that continues to expand in both revenue and people and may be somewhat insulated from the trade conflicts because the majority of these companies primarily operate domestically,” said NCMM Managing Director Doug Farren. “That said, if raw material costs and supply chains are affected by an escalating trade war, the middle market will no doubt feel that pain.”

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