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Middle Market Growth Outpaces National Average, Potential For More

Our latest quarterly Middle Market Indicator (MMI) reveals that while mid-sized business executives expect to deliver better-than-average growth for 2014, they do not anticipate outperforming last year’s growth and revenue performance.

These expectations come on the heels of the latest economic indicators: 74,000 jobs were created nationwide in December, the unemployment rate went up to 6.7 percent, and U.S. GDP growth was revised upward to 3.6 percent. Although the middle market expects to create one million jobs in the year ahead, this projection is 200,000 jobs below the number generated in 2013.

We find the business executives’ softer growth projections follow a moderation of confidence in the national economy, driven by enduring anxiety over policy uncertainty at the state and federal levels.

Moderation in the middle market’s 2014 growth projections proves that actions – or lack thereof – have very real consequences.

Following a year of uncertainty over new health care regulations, the creditworthiness of the U.S. government, and monetary policy – coupled with a government shutdown – it’s no wonder that 52 percent of mid-market executives in our latest survey believe that government uncertainty is stifling economic growth. What’s more, 58 percent say this uncertainty has impacted their business planning through reduced hiring, decreased investment, and diminished extraneous outlays for travel, bonuses, or incentive pay.

Perfect Case Study
Last year’s brinksmanship over the statutory debt ceiling is a perfect case study in how Washington’s politics penetrate beyond the beltway. In both Q3 and Q4 MMI surveys, middle market executives told us that increasing the debt ceiling is important to their business. When asked how a U.S. debt default would impact their business, middle market executives indicated that reduced consumer confidence, reduced business confidence, and increased interest rates were of greatest concern.

But in states like Texas, where middle-market executives realize the benefits of pro-growth initiatives like tax incentives, mid-sized companies experienced above average revenue and employment growth in Q4 2013. These executives report overwhelming satisfaction with the state’s business climate, and expressed overwhelming confidence in the local economy (94 percent) compared to their confidence in the national and global economies (71 percent and 57 percent, respectively).

For the year ahead, Texas’ middle market anticipates significantly outpacing the Fed’s growth projections with 4.5 percent revenue growth ahead.

Fortunately, there are realistic solutions for the problems associated with uncertainty that would go a long way in supporting robust growth among mid-sized firms. Corporate tax reform, for instance, would go a long way in creating a more friendly federal business climate. According to our latest MMI, 42 percent of executives indicated that high corporate tax rates are having a significantly negative effect on growth.

What’s more, addressing the unnecessarily burdensome impact of certain federal regulations would alleviate significant time and cost constraints. For example, mid-sized firms report spending approximately eight percent of their time each week on federal regulatory compliance. For the executives who track regulatory compliance costs, their average out-of-pocket expenses are equal to 8.3 percent of these firms’ annual revenue.

If the U.S. economy is to hit the Fed’s three percent GDP growth projection for 2014, we must all keep an eye toward the real-world impacts of policy action, as well as inaction.

For its part, the U.S. middle market is outperforming average national revenue and employment growth, but continues to encounter policy barriers that artificially cap this growth.

When policymakers commit to creating a business-friendly climate, the growth potential for middle-market companies – along with the broader national economy – can finally be unleashed.

Dr. Anil Makhija is Academic Director, National Center for the Middle Market

Middle Market Growth Outpaces National Average, Potential For More was originally published on Ideas Lab

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