Middle market leaders confident in their own companies – but not the larger economy

June 2022

<p>Middle market leaders confident in their own companies – but not the larger economy</p>

In its second quarter 2022 survey, KeyBank asked 400 owners and executives of middle market businesses – defined as those in the $10 million to $2 billion range1 – about their outlooks on inflation, supply chain and talent recruitment and retention. In addition to revealing the overarching mood of middle market businesses, the survey uncovered some interesting contrasts when comparing different industry sectors.

The prevailing sentiment in the middle market continues to be optimism – but with an important caveat. As COVID-19 concerns continue to subside, most middle market executives characterize the financial outlook for their enterprises as very good or excellent. Yet, doubts about the overall U.S. economy remain, due to inflationary pressure, pending interest rate hikes and the possibility of recession. Despite these broader economic concerns, as well as lingering supply chain issues and labor shortages, middle market businesses are investing in growth and approaching the second half of 2022 with confidence.

“Companies feel very comfortable with their balance sheets, and feel they have opportunities to leverage those balance sheets for growth, but when it comes to the overall U.S. economy, factors like mid-term elections, rising interest rates, inflation, geopolitical risks and increasing energy costs are all contributing to uncertainty about the bigger picture.”

– Josh Lyons, market president and commercial banking sales leader, Oregon and Southwest Washington, KeyBank

Executives have more confidence in their own companies than in the economy at large

Continuing the optimism expressed in first quarter 2022, 78% of middle market business leaders described the outlook for their company’s financial performance over the next 12 months as excellent or very good. Companies in the construction, manufacturing and retail industries are particularly optimistic about their prospects, with more than 80% of executives in each of these sectors expressing an excellent or very good outlook. Middle market executives also reported good news about the impact of the COVID-19 pandemic on their businesses: More than three-quarters said their companies have fully or partially resumed normal operations, while only 67% were approaching normalcy in the first quarter of 2022.

Overall Outlook for the Next Twelve Months

Company – Q2 2022

78% - Excellent/Very Good

17% - Good

5% - Fair/Poor

U.S. Economy – Q2 2022

55% - Excellent/Very Good

22% - Good

23% - Fair/Poor

Yet, with regard to the broader U.S. economy, middle market sentiment is decidedly less positive. Only 55% of middle market business leaders characterized their outlook for the economy at large as excellent or very good, and nearly a quarter (23%) said it was fair or poor. Among those who were skeptical about the health of the economy, inflation, the cost of raw materials and a potential recession were the biggest concerns.

“Backlogs are robust and demand for products and services is high, but everyone is in tune with what’s going on in the economy. They’re optimistic about their own results in the near term, but concerned about the long term.”

– Jim Barger, senior vice president, market president and commercial banking leader, New England Market, KeyBank

Factors cause lower US economic outlook

Q4 2021

60% - Higher Inflation

58% - Cost of raw materials

48% - Potential recession

61% - COVID-19

N/A – Russia/Ukraine conflict

Q2 2022

63% - Higher Inflation

52% Cost of raw materials

54% - Potential recession

49% - COVID-19

46% - Russia/Ukraine conflict

Over the next 12 months, business owners foresee similar factors presenting challenges to their organizations. Asked which issues they anticipated having a negative impact on their operations, an overall increase in inflation (38%), higher prices for oil, gas and energy (35%) and higher labor costs (31%) topped the list.


Inflation emerges as middle market businesses’ primary economic concern

Middle market business owners – especially those who were skeptical about the health of the economy – continue to be apprehensive about inflation. Among the 46% with a less favorable impression of the U.S. economy, overall inflation was a key factor contributing to their outlook. Among those with a negative (fair or poor) outlook on the U.S. economy, 76% cited inflation as a reason for their concerns.

As the Federal Reserve looks to continue raising interest rates to curb soaring inflation during a tight labor market, the possibility of a recession or other negative effects on the economy are top of mind. Federal Reserve Chairman Jerome Powell himself said in May that he could not promise a “soft landing” for the economy as rates go up,2 contributing to recession fears. Of the middle market executives with a good, fair or poor outlook on the economy, 54% are concerned about the potential for a recession – an increase from 48% in the fourth quarter of 2021.


Middle market enterprises in growth mode

Despite inflation and recession concerns, many middle market businesses are in growth mode. More than half (51%) expect to expand their use of technology and automation within the next six months. In the healthcare and retail sectors, 69% and 65% of middle market companies, respectively, anticipate making investments in technology and automation before the end of 2022. Almost as many middle market companies (48%) plan to add full-time, part-time or contract employees. Forty-five percent plan to introduce new products. Finally, the number of businesses expecting to enter new geographic markets in the next 6 months increased significantly between the first and second quarters of 2022, from 27% to 35%.

Method for expanding scope of operations

Q2 2022

51% Expanding the use of technology/automation

48% Adding employees (full-time, part-time or contract)

45% Introducing new products

44% Implementing process improvements

35% Entering new geographic markets

34% Increasing R&D efforts

34% Add new facilities or locations

34% Make significant equipment purchases

33% Expand or renovate current facilities

21% Consider an acquisition

17% Consider a merger

5% Not planning to invest or expand within the next 6 months

Supply chain woes have subsided, but not disappeared

One of the most striking effects of the global pandemic was supply chain disruption for all kinds of materials and goods. In the U.S. middle market, business owners and executives’ concerns about the implications for their companies are slowly, but steadily, diminishing. In the fourth quarter of 2021, nearly half said that supply chain developments had had a negative impact on their businesses in the past 12 months. As of the second quarter of 2022, that proportion has fallen to 39%.

Supply chain difficulties

Q4 2021

13% Very positive impact

23% Somewhat positive impact

17% No impact

37% Somewhat negative impact

10% Very negative impact

36% Very/Somewhat Positive

47% Very/Somewhat Negative

Q1 2022

17% Very positive impact

19% Somewhat positive impact

20% No impact

36% Somewhat negative impact

8% Very negative impact

36% Very/Somewhat Positive

44% Very/Somewhat Negative

Q2 2022

17% Very positive impact

27% Somewhat positive impact

17% No impact

32% Somewhat negative impact

7% Very negative impact

44% Very/Somewhat Positive

39% Very/Somewhat Negative

However, supply chain challenges persist for many businesses. Difficulties in obtaining raw materials persist because of higher costs, lower availability and longer wait times. More than half (64%) of these companies have experienced reduced profit margins as a result. A majority of these companies plan to identify alternative suppliers or sources of raw materials, and 41% plan to pass through cost increases to customers over the next 12 months.

“Customers aren’t balking at cost increases, because everyone understands the boat we’re all in with regards to fuel prices and shipping costs right now. Businesses are not looking to eat into their margins and are looking to pass through as much as they can.”

– Josh Lyons, market president and commercial banking sales leader, Oregon and Southwest Washington, KeyBank

In addition, the survey found a strong correlation between supply chain developments and company outlook. Among the business owners and executives who characterized their company’s financial performance in the next 12 months as good, fair or poor, the number reporting that supply chain issues had a “somewhat negative impact” on their operations increased by 20% between first and second quarter 2022, while the number who reported no impact from supply chain developments fell to 16%. Clearly, middle market businesses with a neutral or negative outlook are significantly more likely than businesses with a positive outlook to be facing continuing supply chain challenges.


Attracting and retaining talent is easier for some businesses than others

When it comes to attracting and retaining talent, middle market executives are generally optimistic about their prospects. However, some are still feeling the effects of the “Great Resignation” and navigating a pervasive shortage of skilled workers in their industries.

About half (51%) of business owners and executives anticipated that it will be easy or very easy to fill job vacancies in the next six months. However, the percentage reporting that it was very easy to retain talent declined from first quarter 2022 to the second quarter, reflecting a labor market that remains skewed in job seekers’ favor.

Perceived difficulty in retaining talent

Q4 2021

21% Very easy

41% Easy

19% Neither easy nor difficult

18% Difficult

1% Very difficult

62% Very Easy/Easy

19% Very Difficult/Difficult

Q1 2022

26% Very easy

31% Easy

25% Neither easy nor difficult

16% Difficult

2% Very difficult

57% Very Easy/Easy

18% Very Difficult/Difficult

Q2 2022

19% Very easy

39% Easy

22% Neither easy nor difficult

19% Difficult

1% Very difficult

58% Very Easy/Easy

20% Very Difficult/Difficult

Among middle market businesses that plan to hire new employees within six months, 80% said they will be looking for skilled workers – a 14% increase over last quarter. On the other hand, only about half of those middle market businesses anticipated hiring new managerial employees, down from 62% in Q1. The construction and healthcare industries reported the highest demand for skilled and professional workers, with 92% of construction businesses seeking skilled workers and 82% in the healthcare field seeking professional employees.

“Construction companies – whether in the commercial or residential space – are very busy. Building supply companies are also doing well. They were significantly affected by supply chain issues, and both distributors and contractors have large backlogs and lots of work to do.”

– Jim Barger, senior vice president, market president and commercial banking leader, New England Market, KeyBank

For the 31% of businesses where leadership anticipates difficulty in hiring new employees, a lack of qualified available workers was by far the biggest challenge cited across employee skill levels (skilled, professional and managerial). The top approaches middle market enterprises are implementing or considering to help attract and retain talent include bonus programs, flexible working hours, comprehensive health and wellness benefits packages, competitive wages/salaries and the option to work remotely. In addition, the number of middle market businesses who considered offering childcare reimbursement or profit-sharing to retain talent doubled in the second quarter to 18% and 23%, respectively.

“So many companies are shorthanded and having to pay higher wages to attract and retain qualified talent,” said Barger. “In some cases, that leads to production slowdowns, but businesses are making it work.”

Conclusion: The continuing tale of two perspectives – optimism at the company level, apprehension about the broader economy

During the second quarter of 2022, middle market business leaders expressed mounting concerns about the direction of the U.S. economy – in, particular the Federal Reserve’s ability to raise interest rates and curb inflation without ushering in a nationwide recession. Nevertheless, executives and business owners reported a positive outlook for their own companies as the effects of COVID-19 on their operations continue to recede. Companies are leveraging their balance sheets; investing in growth via new technology, products and people; and expanding into new markets.

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.

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.

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