Meet the Real Drivers of the Economy
If you’re looking for signs of how the economy is doing, you may consider key economic indicators or benchmarks such as corporate earnings. That’s a little like evaluating a car’s performance by looking at how fast it goes or how much fuel it uses.
To truly understand the reasons behind the performance, you have to look at the parts under the hood. Mid-sized and privately held companies are the engine of the economy, and lately, they’ve been enjoying a growth spurt that's driven them to the head of the pack. That growth has persisted despite the recent stock market turmoil, rising interest rates, falling oil prices and their implications for long-term economic growth.
The real achievers
Mid-sized companies, which Deloitte defines as having annual revenue between $100 million and $1 billion, employ more than one of every four American workers and produce more than a quarter of all revenue generated by U.S. firms. Between 2011 and 2017, for instance, private and middle market companies grew more quickly than other market sectors and created the most new jobs, according to a recent study. In addition, the fastest-growing private companies far surpass the nation’s current economic growth rate of 3.5 percent, with three-year growth figures in the quintuple digits. For these reasons and others, growth in this key sector can provide an accurate bellwether for the economy as a whole.
That growth potential hasn’t been lost on prospective investors. Private equity firms are on track to pump $400 billion into mid-sized firms for the first time. The total value of these deals in the first three quarters of 2018 was up nearly 13 percent compared to last year.
In addition, the middle market is more likely to put that investment money to good use. Mid-sized companies, in part because of their desire to grow market share, invest more heavily in innovation, devoting as much as 8 percent of their revenue to research and development. In fact, in Deloitte’s most recent annual survey of mid-market technology trends, more than half of the survey respondents (57 percent) say they’re spending more on technology this year than the prior year.
Innovation at its best
These companies are also at the forefront of talent development. Deloitte’s mid-market technology survey reveals that executives point to reskilling and redesigning jobs as their top two talent-related priorities as they seek to augment the workforce through technology. In the same survey, 46 percent of private company leaders say they plan to hire more people than they did before implementing new technologies.
The middle market story, however, isn’t all about innovation, reskilling, or growth, as critical as those areas happen to be. It’s also about staying power. More than half of mid-sized firms have been in business for 30 years or more, while a majority of all US companies are less than 10 years old.
Yet these middle market companies remain nimble enough to capitalize on opportunities as they emerge. For instance, the number of middle market firms exporting their goods or services quadrupled between 2011 and 2017.
So, given the critical economic role that the middle market plays, what do these companies see on the economic horizon? In Deloitte’s most recent annual survey of mid-market technology trends, 92 percent of executives are highly optimistic or cautiously optimistic about their company’s business outlook through 2019.
It might be tempting to overlook the middle market, but investors and policymakers do so at their own peril. And as executives at mid-sized firms watch their companies prosper amid economic growth, new job creation, and innovation, they also need to make sure they’re tuned into factors such as demographic shifts in the workforce, digital disruption, and other issues that shape the business agenda.
As mid-market companies continue to demonstrate, there’s power under the hood that’s keeping the economy moving in the right direction.