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Mid-market Execs Expect Modest Growth This Year

Mid-market executives believe their own businesses are poised for growth but are taking a more realistic view of the growth prospects for the overall  U.S. economy in 2013, according to a new report by Deloitte.

Despite economic uncertainty, mid-market executives appear to be taking steps to grow their businesses over the next year. Key balance sheet metrics show improvement in the financial health of mid-market companies. More companies are reporting higher cash balances this year, with 34 percent reporting higher balances in 2013, compared to 15 percent reporting that cash balances have declined.

In Deloitte’s report, “Mid-market Perspectives: 2013 Report on America’s Economic Engine,” mid-market executives expressed lower expectations for U.S. economic growth. The third annual report polled 525 executives at U.S. mid-sized companies with annual revenues between $50 million and $1 billion.

The majority (57 percent) of respondents said they anticipate that over the next year the economy will grow less than 2 percent or not at all. The mid-market executives who responded to the survey cited government budget challenges (69 percent), rising health care costs (60 percent) and high tax rates (53 percent) as the greatest obstacles to U.S. economic growth. These three issues were perceived to be greater obstacles to respondents this year than they were last year.

“The individual factors driving uncertainty have varied from 2011 to 2012 to today,” said Tom McGee, national managing partner of Deloitte Growth Enterprise Services. “Today the primary concerns are the ongoing debates in Washington around our fiscal challenges as a country, as well as concerns around tax rates and health care reform. There’s a second theme also, what I would call resiliency. This is a market segment and a group of companies that have really emerged from the Great Recession and are very focused upon growing and competing. They’re focused on managing the fundamentals of their business. They have done so, I think, quite effectively. Balance sheets are healthier. Investing in talent and technology, and access to capital, have improved. This is a market segment that clearly is concerned about the broader economy and has moderated its growth ambitions. It generally expects to grow this calendar year and has grown, generally speaking, over the course of the last couple of years.”

The housing market and European debt crisis were much less of a concern this year, according to the report. Only 24 percent of respondents cited the housing market as an obstacle to growth, compared to 59 percent in 2012. Only 31 percent of respondents said the European debt crisis was an economic challenge, compared to 50 percent last year.

Companies have taken significant actions to grow their revenue, boost productivity and increase their competitiveness. Mid-market executives are somewhat optimistic about their own businesses, with 46 percent expecting to increase revenue this year.

Respondents said they are most challenged by the gridlock happening in Congress. The survey showed that mid-market executives are concerned with a myriad of issues such as health care costs and budget challenges. Respondents had specific views on the current tax rates.

Survey respondents said they are concerned about the potential effects of tax law changes to their bottom line, with 60 percent believing that the costs of tax compliance will rise in the coming year compared to 48 percent who believed it would rise in 2012.

When it comes to tax reform, mid-market executives are most supportive of lower corporate tax rates (35 percent), a simplified Tax Code (35 percent) and lower individual tax rates (26 percent).

The survey also showed that 41 percent of the respondents would like to see a rollback of health care reform.

“The worries the midmarket executives have are not dissimilar to what many business executives have, which is the uncertainty that’s stemming from the policy debates that are happening in Washington,” said McGee. “This is a very U.S.-centric market segment. The vast majority of their revenues and their people tend to be domiciled inside the United States. The decisions that are made around fiscal challenges in this country, tax policy and new regulations can have a significant impact upon them. That’s clearly their biggest concern, the ongoing debates that are taking place in Washington, and the implications they could have upon them. Despite all of that, when you look at the individual companies and what are their growth prospects, most of them believe that they will grow this year. I would not say that there is bullish optimism, but clearly there is optimism going into this fiscal year around their individual abilities to grow. That has a lot to do with the fact that they can control the outcomes of their individual businesses: the decisions they make, where they choose to invest, etc.”

Forty-three percent of the survey respondents ranked sales as the area where they would be devoting the most time in 2013, far higher than any other priorities.

When asked to name their top growth strategy for 2013, mid-market executives singled out organic growth in domestic markets (32 percent), the development of new products and services (16 percent) and increased productivity (14 percent).

Companies are operating pragmatically, with nearly half (43 percent) of mid-market executives deferring major investments due to the uncertain business climate. Those that are making investments are prioritizing according to their re-adjusted expectations.

Executives ranked hiring among the lower priorities for capital investment in 2013, with only 2 percent of respondents listing it as their top priority and just 7 percent listing it as their second highest priority.

Training was the number one most likely investment in talent in 2013, which may indicate that companies are taking matters into their own hands to address challenges with finding skilled workers.

“Clearly there is going to be some hiring that takes place, but the outlook is not robust in that regard,” said McGee. “Most respondents expect to maintain the status quo. About 40+ percent or so expect to hire, but most who expect to hire would hire modestly, and the rest would maintain the status quo as it relates to their employee base. There don’t appear to be any signals of any type of major workforce reductions or anything in that regard either. There is investment taking place in the whole talent area, whether that’s helping them from a development standpoint, investing to provide new technology. Clearly there is investment in the talent area, but as it relates to incremental hiring, that would appear to be modest expectations.”

Technology remains a high priority for capital investment, with almost half (46 percent) of mid-market executives ranking it as one of their top three investment priorities.

The mid-market is generally expecting modest growth this year. “Clearly there are expectations to grow, but the expectations aren’t robust,” said McGee. “When you think about where we are a number of years into the economic recovery, there’s obviously a lot of capital available to be invested, whether it’s cash sitting on corporate balance sheets or invested in private equity. Interest rates are at historic lows, yet we still don’t see real robust investment activity or real robust M&A activity. A lot of it comes down to the greater uncertainty that business executives have, both in the survey results and in the conversations I have with company executives. Uncertainty exists. Clearly, the last few years there have been significant events that have caused that uncertainty. There’s a general sense that a number of large issues have not yet been resolved, so companies don’t want to get ahead of themselves as it relates to hiring and investment decisions. They’re pragmatic, so they are investing, but not at the level and scale that you might expect at this stage in the economic recovery.”

McGee noted that the study found less globalization happening this year than in the past. “It goes back to this level of uncertainty that exists,” he said. “Companies are more focused on what’s here in front of them in the businesses that they have as opposed to global expansion. There are clearly global expansion plans, but not at the scale that one might expect to be taking place. There’s a balance to what we’ve heard, with clear uncertainty and concern about the broader U.S. economy, but more optimism about their individual company and their ability to grow. I think, in the long term, having optimism about your individual company, focusing on the health of your balance sheet, investing in your employees, becoming more productive, using technology in a more effective way, all of those things have certainly created a platform for companies in this space to grow at a robust level when that veil of uncertainty has been removed from the economy.”

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