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As middle market businesses settled into the first quarter of 2022, COVID-19 seemed to be loosening its grip across the country. But shortly after KeyBank surveyed 400 owners and executives of middle market businesses (in the $10 million to $2 billion range1) about their outlook for the coming months, Russia invaded Ukraine – setting off a geopolitical conflict that introduces new layers of economic uncertainty for businesses of all shapes and sizes.

Even before the conflict, middle market business owners expressed a dual economic view: positivity about their own companies’ success potential, contrasted with uncertainty about the U.S. economy at large. They focused on their eagerness to resume normal business operations and plans to invest in growth – all while keeping a careful eye on supply chains, rising inflation, and a highly competitive labor market.

“Despite the level of uncertainty, businesses are looking to capitalize on near term opportunities. With the amount of stimulus money, and interest rates that are still historically low, there’s so much cash in the system right now. They’re expanding in a targeted way.”

– Kelly Lamirand, market president for Northeast Ohio, KeyBank

Middle market businesses are bullish despite persistent uncertainties in 2022

Compared to the fourth quarter of 2021, slightly more middle market business leaders (77%) reported having an excellent or very good outlook for their company’s financial performance over the next 12 months. Larger companies ($500 million to $2 billion in revenue) and those in the construction industry were particularly optimistic about their prospects for 2022, with more than 80% of survey respondents in both categories reporting an excellent or very good outlook. However, as was the case in late 2021, significantly fewer business owners and executives (55%) expressed the same levels of optimism about the broader U.S. economy – especially among those who rated their own company’s outlook as fair or poor.

Overall Outlook for the Next Twelve Months


Company – Q1 2022

36% - Excellent

41% - Very Good

17% - Good

6% - Poor


State Economy – Q1 2022

29% - Excellent

34% - Very Good

22% - Good

12% - Fair

3% - Poor


U.S. Economy – Q1 2022

26% - Excellent

30% - Very Good

19% - Good

19% - Fair

6% - Poor

While two-thirds of respondents reported being somewhat or fully back to normal business operations since the onset of the pandemic, other factors contributed to uncertainty in the middle market. Thirty-nine percent of middle market executives said that supply chain disruptions are currently having a negative impact on their business, and 32% expected these issues to continue over the next 12 months. About the same number (38%) said they were already feeling the negative effects of rising inflation, with about 43% expecting inflation to impact their businesses in 2022.

Despite these uncertainties, middle market businesses started the year off with plans to expand the scope of their operations. Half of those surveyed anticipated bringing on new employees within the next six months, and nearly as many (47%) plan to further invest in technology/automation. A quarter (24%) said they were considering an acquisition; among companies in the $500 million to $2 billion revenue range, that number climbed to 31 percent.

Method for expanding scope of operations


Q1 2022


50% - Ad employees (fulltime, part-time or contract)

47% - Expanding the use of technology/automation

44% - Implementing process improvements

41% - Introducing new products

34% - Increasing R&D efforts

32% - Add new facilities or locations

32% - Expand or renovate current facilities

32% - Make significant equipment purchases

27% - Entering new geographic markets

24% - Consider an acquisition

17% - Consider a merger

6% - Not planning to invest in or expand operations within the next 6 months

“M&A activity is robust right now,” observed Lamirand. “Multiples are super high, even in the lower end of the market. It reminds me of the hot housing market – before you even get to see a place in person, it’s gone.”

As the pandemic fades, consumer restrictions lift, and economic activity picks up, middle market businesses are eager to use available cash to seize opportunities for growth. But uncertainty persists, especially when it comes to supply chains, inflation, and the labor market.

Supply chain disruptions continue to impact the middle market

The havoc wreaked on global supply chains during the pandemic continues to ripple through the economy. Of the executives Key surveyed, nearly half (44%) reported that supply chain issues had negatively impacted their business within the past 12 months. Among those reporting a neutral or negative outlook on the overall U.S. economy, that number increased to two-thirds, suggesting that supply chain woes have significantly contributed to economic pessimism in the middle market.

Digging deeper into the supply chain dilemma, the cost and availability of raw materials as well as the loss of key suppliers continued to rank as survey respondents’ top three concerns. Of those who reported that supply chains had negatively impacted their businesses, 55% have experienced a decrease in the efficiency/productivity of their business operations. Nearly half (47%) reported both lower revenues and thinner profit margins because of supply chain difficulties.

Supply chain difficulties 


Q1 2022


69% - Higher costs of raw materials/commodities

61% - Less availability/timeliness of receiving raw materials/commodities

37% - Loss of some suppliers

19% - Extreme weather events/natural disasters

19% - Changes in trade agreements

12% - Foreign Tariffs

4% - Other

In response to supply chain disruptions, the middle market businesses impacted are working to identify alternative suppliers (44%), passing increased costs on to their customers (42%), and carrying excess inventory as a buffer (42%). In addition, 43% expect to update their supply chain information/management systems – compared to only 23% who planned to take that approach last quarter.

Fortunately, lack of availability and long wait times for raw materials seem to be abating: 61% of respondents said they were experiencing these problems in Q1 of 2022, compared to 76% the previous quarter.

“The general sentiment among our clients is that the supply chain issues will work out over the next eighteen (18) months – however the Ukraine-Russia crisis has complicated that view in the short term. While optimistic that things will get better, smart businesses are taking steps to prepare in case they get worse in the short term.”

– Christopher Doyle, KeyBank commercial banking sales leader in Cleveland, Ohio

A recent report from Moody’s Analytics stated that the greatest risk to global supply chains is no longer the pandemic, but the war in Ukraine and its resulting geopolitical and economic uncertainties. Companies that rely on energy resources will be especially affected, according to the report.2

Rising inflation and interest rate hikes loom large for the middle market

In the first quarter of 2022, inflation emerged as a broad concern among middle market businesses – and especially among the 45% of survey respondents with a less optimistic economic outlook. Sixty percent of these skeptical middle market business leaders cited higher rates of overall inflation as a contributing factor to their concerns about the economy, along with higher costs for labor and raw materials. However, as Lamirand observed, businesses in sectors where demand remains high can pass those price increases along to customers.

“With demand remaining strong, companies can increase prices and maintain their margins. Businesses that are sitting on excess inventory are seeing even greater profits when they can pass along those price increases to customers.” That said, Lamirand is also cautioning clients that strong demand won’t last forever, especially if prices stay high. “The correction hasn’t happened yet, but at some point, it will. It always does.”

Regardless of their economic outlook, 43% of business owners and executives surveyed anticipated that an overall increase in inflation will have a negative impact on their businesses within the next 12 months – more than any other factor listed. More than a third (38%) reported that they are already feeling the effects of inflation.

Factors currently having or anticipated to have negative impact on business in next 12 months


Q1 2022


26% - Overall increase in inflation

23% - Supply chain disruptions

22% - Higher labor costs

20% - Higher costs of raw materials/commodities

20% - Ability to attract talent

16% - Ability to retain talent

15% - Higher energy costs

14% - Higher healthcare costs

11% - Concerns with cybersecurity

9% - Ability to attract new customers/grow the business

6% - Concerns with cash flow

4% - Access to capital

Middle market businesses are certainly not alone when it comes to apprehensions around rising inflation. Driven primarily by rising food and energy costs, the U.S. inflation rate climbed to 7.9% in February, a level not seen in decades. Economists anticipate that Russia’s war in Ukraine could push prices even higher, exerting additional upward pressure on the rate of inflation in the U.S. and around the world.3 In an effort to slow inflation, the Federal Reserve announced its first interest rate hike since 2018, to be followed by additional increases throughout the year. However, NPR reports that the Federal Reserve is “walking a tightrope” in trying to bring inflation under control without dealing too large a blow to the country’s economic growth.4

In a tight labor market, flexibility is crucial

Current conditions in the U.S. labor market are complicating the picture for middle market businesses. In February, the unemployment rate fell to 3.8%, edging closer to its pre-pandemic level of 3.5 percent.5 As a result, competition for qualified workers remains high.

Middle market business leaders are acutely aware of the tight labor market: among the 50% who plan to hire over the next six months, more than 6 in 10 anticipated some degree of difficulty hiring skilled workers, non-managerial professionals, and managers. When asked to identify the main obstacles to filling their hiring needs, they cited scarcity of qualified workers, high salary requirements, and the length of time required to identify and hire qualified workers.

Types of employees planning to hire and expected difficulty


Q1 2022


Positions Expected to Hire


66% - Skilled

64% - Professional/non-managerial

62% - Managerial

29% - Clerical

23% - Unskilled workers


Difficulty Hiring Position


63% - Skilled

68% - Professional/non-managerial

65% - Managerial

39% - Clerical

57% - Unskilled workers

To attract and retain talent in this tight labor market, middle market businesses planned to offer competitive wages, flexible working hours, and comprehensive benefits packages.

“You’ve got to have the best people, and businesses are willing to do whatever it takes to get them on board,” said Doyle in Cleveland. “Companies with strong profits can be very competitive when it comes to attracting and retaining talent and may be more aggressive with signing bonuses and profit-sharing. Many have a surplus of cash – giving that back to employees in some way can be a strong tactic in this labor market.”

Measures companies are considering using to attract talent


Q1 2022


44% - The competitiveness of wages/salaries

43% - Flexible hours/schedule

38% - Health and wellness benefits

37% - Bonus programs

35% - Paid time off (PTO)

34% - Company match on retirement plans (e.g., 401K plans)

34% - Creating a safe working environment at company offices and physical locations

32% - Options to work remotely

29% - New employee signing bonuses

23% - Job training and educational benefits (such as tuition reimbursement)

16% - Profit sharing

14% - Stock options

11% - Social impact/volunteer initiatives

10% - Offering child care reimbursement

4% - Nothing

Measures companies are considering using to retain talent


Q1 2022


44% - The competitiveness of wages/salaries

43% - Flexible hours/schedule

40% - Health and wellness benefits

39% - Bonus programs

37% - Paid time off (PTO)

36% - Creating a safe working environment at company offices and physical locations

34% - Options to work remotely

33% - Company match on retirement plans (e.g., 401K plans)

29% - New employee signing bonuses

24% - Job training and educational benefits (such as tuition reimbursement)

14% - Stock Options

12% - Profit sharing

11% - Social impact/volunteer initiatives

9% - Offering child care reimbursement

4% - Nothing

Survey results also show that for many businesses, the shift toward remote work is here to stay. About one-third of business owners and executives said they will continue to hire remote employees even after they have fully resumed normal operations, and many anticipated reconfiguring (30%) or reducing the size of (21%) their offices or facilities. “We are confident that pandemic-driven flexibility measures are here to stay,” said Lamirand.

Conclusion: COVID-19 may be subsiding, but uncertainty is not

During the first quarter of 2022, middle market businesses were feeling optimistic as many resumed normal business operations after two years of pandemic restrictions and protocols. However, Russia’s invasion of Ukraine will likely exacerbate existing concerns around supply chain disruptions and inflation. And with the Federal Reserve raising interest rates carefully so as not to disrupt a strong labor market, competition for qualified talent is likely to remain stiff in 2022.

Whether you’re gearing up for an acquisition, or seeking to hedge against looming uncertainty, KeyBank middle market experts can provide customized insights and real-time counsel to guide your decision-making. For more information on KeyBank’s middle market capabilities, contact a KeyBank Relationship Manager.

For more information on KeyBank’s middle market capabilities, contact a KeyBank Relationship Manager.

1

Business Owners/Executives – This sample group represents the opinions of respondents who are specifically business owners, C-suite professionals, or have the title of SVP, VP, controller or treasurer ($10M to under $2B revenues).

2

CNN Business. “Russia-Ukraine crisis replaces Covid as top risk to global supply chains,” Moody’s says.” March 4, 2022. https://www.cnn.com/2022/03/04/business/russia-ukraine-supply-chain-oil/index.html

3

Wall Street Journal: “Inflation Reached 7.9% in February; Consumer Prices Are the Highest in 40 Years.” March 10, 2022. https://www.wsj.com/articles/us-inflation-consumer-price-index-february-2022-11646857681?page=1

4

NPR: “The Federal Reserve raises interest rates for the first time since 2018.” March 16, 2022. https://www.npr.org/2022/03/16/1086484178/the-federal-reserve-interest-rates-inflation

5

Bureau of Labor Statistics: “Employment Situation Summary.” March 4, 2022. https://www.bls.gov/news.release/empsit.nr0.htm

“KeyBank Middle Market Business Sentiment Survey” February 1, 2022 - February 15, 2022.

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

KeyBank is Member FDIC.