Report Summary

Mid-market perspectives: 2011 report on America’s economic engine is based on a Deloitte-commissioned survey of mid-market firms conducted by the Economist Intelligence Unit (EIU).

Mid-market companies are a hidden powerhouse of the US economy. Although the media and the investment community tend to focus on large public companies, in terms of total revenues and number of employees, the middle market rivals the corporate giants that dominate business headlines. The success of the middle market in the coming years will have a profound impact on US unemployment rates, consumer confidence and spending, and overall economic growth.

For perspective, consider this: according to 2007 data—the most recent figures available from the US Census—mid-market companies generated $6.1 trillion in annual revenues, equivalent to 40 percent of US GDP in that year, and paid 24.6 million people a total of $1.13 trillion in salaries. The S&P 100 companies, which contribute nearly 45 percent of U.S. stock market capitalization, generate only $3.7 trillion in annual revenues, while the companies represented in the Dow Jones Industrial Average (DJIA) generate less than half of the annual revenues of mid-market companies. In terms of employment, which often drives consumer spending and confidence, the middle market is even more influential. In addition to employing more people than the S&P 500, mid-market companies employ more than three times as many people as DJIA companies. Clearly, these employers play a critical role in determining job growth.

This Deloitte-commissioned survey of mid-market firms conducted by the Economist Intelligence Unit (EIU) in February 2011 indicates growing
optimism, with a full 93 percent of respondents expecting the U.S. economy to experience some growth in 2011. Many of the survey
respondents reported that their companies have experienced an improvement in cash balances, productivity, and profits compared with a year ago. Those gains are triggering expectations and plans for steady growth across the segment. In the next 12 months, the mid-market companies surveyed plan to add new products and services (46 percent), expand their reach in the United States (56 percent) and abroad (34 percent), and up-sell or cross-sell to existing customer bases (46 percent).

We note, however, that the respondents' optimism is tempered with caution. Mid-market business leaders recognize that there are still significant obstacles to achieving long-term goals, including an uncertain economic outlook, rising interest rates, uncertain market demand, and a steady increase in the cost of oil and raw materials. In particular, there are efforts under way at a majority of companies to significantly reduce their overall debt levels. They are closely monitoring employment trends, deficits, health care costs, and the potential for tax hikes and holding off on some expansion plans until they see whether the economy will continue to improve. These challenges threaten mid-market growth and underscore the need for careful business planning. They also identify important measures that respondents believe could be taken by the U.S. government to further bolster the middle market, including tax breaks, low interest rates, and other incentives.

This report, written by the Economist Intelligence Unit, looks at the current state of mid-market companies, their prospects and plans, and the strategic decisions they have made to survive and thrive following the Great Recession of 2008–09.

Signs of optimism

The survey findings reveal that many mid-market firms are well positioned and eager for growth, having spent the downturn improving productivity, deleveraging, and rightsizing their operations. In many cases, headcounts already are climbing toward prerecession levels, and strategic business needs will play a crucial role in future hiring decisions. If mid-market companies can tackle their biggest obstacles, including deficits, taxes, and uncertain market demand, they are likely to exercise even more influence on the U.S. economy in coming years.

Revenues, cash flow, profits, and spending are all expected to rise. The following results suggest some optimism on the part of mid-market companies:

• 81 percent of respondents expect revenues to rise in the next year, with 65 percent expecting revenues to surpass their 2007 levels.
• By 2012, 59 percent anticipate gross profit margins will be higher than they were before the recession.
• 65 percent of respondents report that debt ratios are below pre-recession levels and will stay lower over the next year.
• 59 percent of respondents say that in a year's time, capital investment will be higher than it was before the recession.

Productivity increases remain high. Most mid-market companies have realized improved productivity and plan to continue emphasizing gains in this area.

• 72 percent of respondents report productivity today is higher than before the recession; 79 percent believe that by 2012, productivity will be higher than it was in 2007.
• 84 percent think productivity will be higher one year from now.

Headcounts at mid-market companies are rising. After months of downsizing and streamlining, some mid-market companies are hiring again.

• 69 percent expect to hire full-time employees this year, and 54 percent anticipate headcount to exceed pre-recession levels.
• 55 percent indicate that they will add full-time employees in the coming year to specifically support growth strategies.

Mid-market firms are positioning themselves to grow and globalize.
Many organizations are expanding their reach in the United States and overseas and adding new products and services in an effort to diversify.

• 56 percent of respondents say expanding target markets in the United States will be critical to their growth strategies in the coming year.
• 46 percent say they plan to up-sell or cross-sell to existing customer bases or expand or diversify products and services.
• 34 percent of all the companies surveyed and 44 percent of the respondents with $500 million to $1 billion in revenues expect to expand target markets globally.

Financing options and access to capital are stabilizing. 
While financing options may not be as accessible as they were prerecession, most survey respondents plan on securing new financing and do not seem to consider financing as a major business challenge.

• Only 16 percent do not expect to pursue new financing;
• 38 percent plan to use new financing for U.S. business expansion
• 35 percent plan to pursue asset-based financing compared with only 10 percent who plan to pursue unsecured loans
• When asked about main obstacles to growth, only 18 percent cited availability and/or cost of credit.

Proceed with caution

While much of this news is positive, optimism is tempered with caution. Factors such as deficits, taxes, and uncertain market demand are deep concerns for leaders of midmarket companies.

The strength of the economic recovery is uncertain. An overwhelming majority anticipates some form of economic growth, but there are doubts about the strength of the recovery. 

• Although 93 percent of survey respondents expect the economy to grow, only 20 percent anticipate it will expand by more than 3.5 percent this year—the pace economists say is needed for real job growth.

Systemic pressure is being caused by government debt. Strikingly, government debt at all levels was repeatedly cited by business leaders as a barrier to growth:

• 50 percent of those polled believe that federal, state, and municipal challenges pose a significant obstacle to US economic growth.

Government decisions and regulatory challenges cause concerns.
Potential tax increases, interest rates, health care costs, and general uncertainty about the economy are causing mid-market business executives to restrain their optimism as they wait to see how and when the economy will improve.

• 33 percent of respondents say rising health care costs are among the top barriers to U.S. economic growth.
• 33 percent of survey respondents say that reducing corporate tax rates would be the best way the government could support mid-market growth in the next year.
• 32 percent of respondents believe the government should keep interest rates low to spur consumer spending.
• 30 percent cite high tax rates.
• 23 percent would like to see the government roll back health care reform.