Middle market companies--those businesses loosely defined as having revenues of at least tens of millions of dollars per year, but less than a billion--are not only having a great year, they are looking forward to even better times to come.
That's the conclusion from this quarter's U.S. Middle Market Business Index from accounting firm RSM US LLP and the U.S. Chamber of Commerce. The index, which is based on the responses of more than 700 middle market executives from earlier this year, has hit an all-time high. The executives--who were asked questions about revenues, profits, inventories, credit, compensation, and planned capital expenditures and hiring--were overwhelmingly bullish not only on their companies' economic strength but on the forward outlook for the remainder of this year.
Why? By now we should know. A less regulatory environment in Washington. Lower tax rates on the horizon. A strong labor market. A general pro-business sentiment.
"This quarter's findings correspond nicely with the direction of fundamental hard data, soft data, and anecdotal evidence we're seeing nationwide," Joe Brusuelas, RSM US LLP's chief economist, said in a press release. "The U.S. economy is growing well above its long-term trend of 1.5 percent amid a tightening labor market that's fueling wage growth."
All of this sounds great, except for one thing: These companies are still--for the most part--not spending.
Sure, many companies are competing for people in this tight job market, and 62 percent of those participating in the index said they were increasing wages over the next 180 days. That's the good news. But what about capital spending? Unfortunately, that's not so good.
The survey found that most of the executives still remained "hesitant" when it came to making capital investments, particularly investments in digital assets like websites and technologies needed to be competitive. This is not a new thing. The lack of spending continues a pattern that has dogged the middle market over the past few quarters, even as revenues and profits have been strong. This quarter, only half of the executives actually increased capital spending.
So what's going on? Three things.
The 2008-2009 recession taught us all a lesson. It's amazing to think that the recession happened almost 10 years ago. To many mid-market executives, particularly senior executives who lived through the recession, that memory is still very, very vivid. We remember the markets collapsing around us. We recall the too-big-to-fail institutions that did indeed fail. We no longer have the same level of trust in experts, pundits, politicians, and the financial leaders who turned out to be as naive as the rest of us. We've learned to hoard more cash, keep our overhead low, and only invest when we are very, very certain of a satisfactory return on investment. The recession took away many executives' appetite for risk.
When it comes to tech, sometimes fixing is better than replacing. Ask anyone over the age of 30 and they'll tell you they've been burned once, twice, or more by technology. Software and hardware makers promise the world and then deliver something far less. We've overpaid for systems and struggled to get our arms around the many options, features, bells and whistles that were supposed to have made our companies more profitable...but didn't. We've learned. So for the technologies that we have, we're doing our best to get the most from them. Many of my middle market clients, no longer having the stomach to replace one flawed system with another that's likely equally flawed, have chosen to stay the course, work with their vendors, hire consultants, and improve on what they've got.
CEOs are still kind of nervous. Our president--though very business-friendly and refreshingly honest--is so erratic, un-presidential, and unpredictable that some wonder whether he'll last through his term. Tariffs, anti-immigration, and anti-trade proposals have given great pause to our hope for strong economic growth. Saber-rattling from China, Russia, North Korea, and Iran continue to stoke fears of wars that could disrupt business. Wild swings in stocks test our faith in our financial systems. Warnings of interest rate rises from the Federal Reserve create concerns about inflation and other impediments to growth. All of these have been holding middle market executives back from freely investing in capital improvements. At least for now.
But, at some point, middle market leaders are going to have to bite the bullet, make investments, and take some risks. Otherwise, they could lose a step to those competitors that are. The question is when that will occur. Given the factors I've noted above, I'm not so sure it will happen in 2018.
Author's Note: The U.S. Chamber of Commerce is a client of my firm, The Marks Group PC, but I have received no compensation to write this article.