The Middle Market Stimulus
While the country as a whole is in the economic doldrums—the unemployment rate remains at 9.1 percent—a huge swath of the American economy is growing: the middle market.
The middle market is generally defined as companies with $5 million to $1 billion in annual revenue, though the actual boundaries vary somewhat. A recent study by Deloitte found that companies with revenues between $50 million and $1 billion employ more people (24.6 million) and have larger revenues ($6.1 trillion) than either the DJIA companies (5.9 million, $2.6 trillion) or the S&P 100 (11.8 million, $3.7 trillion).
Middle-market companies employ more people even than the S&P 500 (21.9 million), and their total revenues don’t lag too far behind ($8.3 trillion). While many large companies are struggling and downsizing, middle-market companies are thriving and hiring.
If America is going to start hiring again, the middle market is likely to lead the way. The Deloitte study, published in April, says that as many as eight in 10 executives from the American middle market expect annual revenues to increase in 2011, and 69 percent of the executives plan on hiring new employees in 2011.
Similarly, an IBM survey of chief financial officers of middle market companies found that 65 percent have started hiring this year and 80 percent will be hiring in the next 12 months. This is up 24 points from the third quarter of 2010. And, best of all, most of these jobs will remain domestic. Over half of middle-market companies have no workforce outside the country, according to the Deloitte study. Only 18 percent have more than a quarter of their employees based abroad.
Why is the middle market able to drive job creation? Innovation. Middle-market companies are sometimes considered “super small businesses” — too successful to be truly “small” but still marked by the entrepreneurial spirit. Most remain privately held, and many are family-run.
Though the middle market spans a wide revenue range, its companies are concentrated at the lower end. More than 174,000 businesses report revenue between $5 million and $10 million, according to The Deal. That’s just shy of half the whole middle market. An additional 156,000, or 42 percent of the total, had revenues between $10 million and $50 million.
The line between small businesses and the middle market is often blurry, as successful small businesses evolve into middle-market companies pretty rapidly. According to a recent study by the Kauffman Foundation, both on average and for all but seven years between 1977 and 2005, existing firms have been net job destroyers, losing 1 million jobs net combined per year. New companies, in contrast, add an average of 3 million jobs in their first year of existence.
Although not every middle-market company is a job creator, the vast majority are looking to hire. The Bureau of Labor Statistics monthly report continually bears this out. In August, for example, ADP private payroll report indicated that payrolls of less than 500 workers rose 88,000 while employment on payrolls of 500 or more workers rose only 3,000. Fortune 500 companies shed 800,000 jobs in 2009 alone.
Middle-market companies now report higher levels of productivity, lower debt ratios, and stronger balance sheets than before the recession. These companies are looking to expand through active add-on acquisitions and other mergers — targeting either weaker competitors or complimentary product lines and offerings. According to data compiled by Baird and Dealogic, there were approximately 5,300 middle-market M&A deals in 2010 alone, totaling $347 billion. The number of middle companies itself could be the key to increasing GDP, according to Kauffman. The study finds that if 60 more companies with $1 billion were launched every year, it would achieve a permanent percentage point increase in GDP.
The middle market already represents 40 percent of the national GDP and yet it remains largely unnoticed. While business and political leaders continue to focus on deficit reduction, tax reform, and other measures to stimulate the economy, the middle market continues to move along under the radar.