Middle-market leaders confident in their companies, but not the larger economy

Drew Yergensen 

The prevailing sentiment in the middle market continues to be optimism — but with an important caveat. As COVID-19 concerns continue to subside, most middle-market executives characterize the financial outlook for their enterprises as very good or excellent.

Yet, doubts about the overall U.S. economy remain, due to inflationary pressure, interest rate hikes and the possibility of recession. Despite these broader economic concerns, as well as lingering supply chain issues and labor shortages, middle-market businesses are investing in growth and approaching the second half of 2022 with confidence.

In its second quarter 2022 survey, KeyBank asked 400 owners and executives of middle-market businesses — defined as those in the $10 million to $2 billion range — about their outlooks on inflation, supply chain and talent recruitment and retention. In addition to revealing the overarching mood of middle-market businesses, the survey uncovered some interesting contrasts when comparing different industry sectors.

Executives have more confidence in their own companies than in the economy at large.

Continuing the optimism expressed in first quarter 2022, 78 percent of middle-market business leaders described the outlook for their company’s financial performance over the next 12 months as excellent or very good. Companies in the construction, manufacturing and retail industries are particularly optimistic about their prospects, with more than 80 percent of executives in each of these sectors expressing an excellent or very good outlook. Middle-market executives also reported good news about the impact of the COVID-19 pandemic on their businesses: More than three-quarters said their companies have fully or partially resumed normal operations, while only 67 percent were approaching normalcy in the first quarter of 2022.

Yet, with regard to the broader U.S. economy, middle-market sentiment is decidedly less positive. Only 55 percent of middle-market business leaders characterized their outlook for the economy at large as excellent or very good, and nearly a quarter (24 percent) said it was fair or poor.

Among those who were skeptical about the health of the economy, inflation, the cost of raw materials and a potential recession were the biggest concerns.

Over the next 12 months, business owners foresee similar factors presenting challenges to their organizations. Asked which issues they anticipated having a negative impact on their operations, an overall increase in inflation (38 percent), higher prices for oil, gas and energy (35 percent) and higher labor costs (31 percent) topped the list.

Inflation emerges as middle-market businesses’ primary economic concern.

Middle-market business owners — especially those who were skeptical about the health of the economy — continue to be apprehensive about inflation. Among the 46 percent with a less favorable impression of the U.S. economy, overall inflation was a key factor contributing to their outlook. Among those with a negative (fair or poor) outlook on the U.S. economy, 76 percent cited inflation as a reason for their concerns.

As the Federal Reserve looks to continue raising interest rates to curb soaring inflation during a tight labor market, the possibility of a recession or other negative effects on the economy are top of mind. Of the middle-market executives with a good, fair or poor outlook on the economy, 54 percent are concerned about the potential for a recession — an increase from 48 percent in the fourth quarter of 2021.

Middle-market enterprises are in growth mode.

Despite inflation and recession concerns, many middle-market businesses are in growth mode. More than half (51 percent) expect to expand their use of technology and automation within the next six months. In the healthcare and retail sectors, 69 percent and 65 percent of middle-market companies, respectively, anticipate making investments in technology and automation before the end of 2022. Almost as many middle-market companies (48 percent) plan to add full-time, part-time or contract employees. Forty-five percent plan to introduce new products.

Finally, the number of businesses expecting to enter new geographic markets in the next six months increased significantly between the first and second quarters of 2022, from 27 percent to 35 percent.

Attracting and retaining talent is easier for some businesses than others.

When it comes to attracting and retaining talent, middle-market executives are generally optimistic about their prospects. However, some are still feeling the effects of the “Great Resignation” and navigating a pervasive shortage of skilled workers in their industries.

About half (51 percent) of business owners and executives anticipated that it will be easy or very easy to fill job vacancies in the next six months. However, the percentage reporting that it was very easy to retain talent declined from first quarter 2022 to the second quarter, reflecting a labor market that remains skewed in job seekers’ favor.

Among middle-market businesses that plan to hire new employees within six months, 80 percent said they will be looking for skilled workers — a 14 percent increase over last quarter. On the other hand, only about half of those middle-market businesses anticipated hiring new managerial employees, down from 62 percent in Q1. The construction and healthcare industries reported the highest demand for skilled and professional workers, with 92 percent of construction businesses seeking skilled workers and 82 percent in the healthcare field seeking professional employees.

For the 31 percent of businesses where leadership anticipates difficulty in hiring new employees, a lack of qualified available workers was by far the biggest challenge cited across employee skill levels (skilled, professional and managerial). The top approaches middle-market enterprises are implementing or considering helping attract and retain talent include bonus programs, flexible working hours, comprehensive health and wellness benefits packages, competitive wages/salaries and the option to work remotely. In addition, the number of middle-market businesses who considered offering childcare reimbursement or profit-sharing to retain talent doubled in the second quarter to 18 percent and 23 percent, respectively.

Conclusion: The continuing tale of two perspectives — optimism at the company level, apprehension about the broader economy.

During the second quarter of 2022, middle-market business leaders expressed mounting concerns about the direction of the U.S. economy — in, particular the Federal Reserve’s ability to raise interest rates and curb inflation without ushering in a nationwide recession. Nevertheless, executives and business owners reported a positive outlook for their own companies as the effects of COVID-19 on their operations continue to recede. Companies are leveraging their balance sheets; investing in growth via new technology, products and people; and expanding into new markets.

Whether you’re gearing up for an acquisition or seeking to hedge against looming uncertainty, your banker can provide customized insights and real-time counsel to guide your decision-making.

Drew Yergensen is the market president and commercial banking leader with KeyBank in Utah.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.