For the first quarter of 2016, year-over-year revenue growth is up in the middle market and employment growth remains stable, representing the end and possible reversal of the downward trajectory in growth rates that defined the middle market in 2015. While middle market revenue and employment both grew last year, consistently outpacing the growth of larger businesses, the rate of that growth declined steadily over the course of 2015. Small businesses in particular experienced a slowdown in growth at the end of last year. That trend has stopped and appears to have reversed. For now, growth rates appear to have stabilized, though at slightly lower levels than experienced in 2014 and the first half of 2015. At the same time, confidence has returned after slipping last quarter, and the indications for the coming year suggest that the pace of growth may once again accelerate in the critical middle market segment.
The proportion of middle market companies reporting year-over- year performance improvements held steady since last quarter, with 58% of firms contending that business is better today than it was one year ago. Among small middle market companies (with revenues between $10 million and $50 million) the proportion of firms reporting improved year-over-year performance rose significantly to 60% from 51% at the end of 2015. More retail trade businesses reported improved performance this quarter; however, the number of healthcare firms saying business has improved since last year is down notably. Across core equities—including workforce issues, innovation, cost structure, customer acquisition, and operational excellence—middle market businesses mostly describe company performance as moderate to fairly good.
As with performance, the number of companies reporting year-over-year revenue increases has remained stable, with 69% of businesses reporting growth. Businesses are building their revenues primarily by growing their organizations; one in five firms has invested in additional advertising and marketing.
Across the middle market, revenue growth continues at a healthy rate of 6.3%, a slight uptick from the 6.1% growth rate recorded a quarter ago. The year-over-year growth rate among the smallest middle market businesses rebounded since dropping significantly last quarter. From an industry perspective, the business services and financial services sectors continue to post the highest revenue growth.
Approximately four in 10 middle market businesses report year-over-year increases in employment, the same percentage as at the start of 2015. Although employment growth rates declined gradually over the course of the past year, they have remained steady at 3.6% for the past six months. As with revenue, the smallest middle market companies rallied since last quarter, reporting a notable increase in year-over-year employment growth rates for Q1 2016.
The short-term business outlook, based on anticipated business climate, forecasted demand, and expected sales, is better than at any other time during the past year. While most middle market business leaders expect the business climate to remain unchanged in the short-term, one in five anticipate a more favorable environment. Almost half (46%) of middle market businesses, and especially small firms, expect sales to increase, and fewer firms expect an increase in costs in the next three months. Most companies foresee the size of the workforce holding steady.
Looking further into the future, companies, and especially smaller middle market businesses, forecast a significant increase in the rate of year-over-year revenue growth. The construction, financial services, and healthcare sectors are particularly optimistic about future growth. However, expectations for employment growth remain stable across all revenue segments. Most middle market companies believe their workforce is the right size for current market conditions, which will likely keep employment growth modest in the months to come.
Staffing issues, compliance with regulations, and competition will continue to be the strongest headwinds as middle market companies work to grow their businesses throughout 2016 and beyond.
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