The Silver Lining of the Mid-Market’s Gloomy Economic Outlook
Recent surveys find middle-market companies remain pessimistic about the economy, but optimistic about their own businesses. JPMorgan Chase’s head economist explains what's behind this dichotomy
With the U.S. economy facing some of the greatest uncertainty it’s seen in years, middle-market companies are struggling to find optimism about the environment around them, according to recent research.
Inflation and the threat of a recession are intensifying existing challenges like ongoing labor shortages and supply chain disruptions for businesses of all sizes. In the middle market, new data from JPMorgan Chase suggests a significant drop in optimism levels when business leaders consider the future of the economy.
Yet those troubling findings do not tell the whole story.
“Despite the concerns that people have, that are related to what’s going on in the interest rate environment and what the Fed is doing and inflation, they’re still pretty optimistic about their own situation,” Jim Glassman, JPMorgan Chase’s head economist, explains to Middle Market Growth.
Indeed, the data suggests midmarket business leaders are more optimistic than ever about their own operations. What’s behind this seemingly contradictory dichotomy?
A Dampened Outlook
New data from JPMorgan Chase suggests a significant drop in optimism levels when business leaders consider the future of the economy. Yet those troubling findings do not tell the whole story.
JPMorgan’s 2022 Business Leaders Outlook Pulse report surveyed more than 1,500 middle-market business leaders between May 25 and June 10, 2022. Its conclusions were stark: a full 100% of respondents said they are currently facing business challenges. The majority pointed to the higher costs of doing business – including inflation – as well as labor as key challenges.
According to JPMorgan researchers, midmarket optimism for the national economy is at its lowest level in 12 years, and down 75% from just one year prior. Pessimism, meanwhile, spiked, with 51% of midmarket executives expressing pessimism for the national economy’s outlook, compared to just 10% last year.
Worse, only 9% of business leaders surveyed said they have an optimistic outlook for the global economy.
The data may seem shocking, but Glassman notes that middle-market business executives’ growing concerns aren’t surprising, considering the widespread discussions about a potential recession.
“There is a lot of unknown here, which is worrying business leaders—we don’t quite know where this is going,” he says. “We know there are a lot of bottleneck problems and inflation issues related to the way we recovered from the pandemic. And we just don’t know what this is going to mean for interest rates.”
JPMorgan’s survey isn’t the only research to draw such conclusions. Another recent report from Umpqua Bank drew similar conclusions, with the majority of small and middle-market companies surveyed reporting their struggles with inflation and the rising cost of goods, as well as with finding talent. The bank’s 2022 Business Barometer report, which spoke with more than 1,200 business executives from small and midmarket companies in the U.S., also found that 90% of small and midmarket companies say inflation is a top concern, while 90% report being impacted by the “soaring” cost of goods.
In a statement, Umpqua president Tory Nixon highlights the “remarkable period of disruption” that businesses endured in recent years. “The pre-pandemic economic environment of low-inflation, low-cost capital, and high growth has shifted,” he adds.
While both surveys highlight the immense concerns midmarket leaders have over the national economy, both also find that these executives remain optimistic about their own futures. JPMorgan found more than 70% are optimistic about company performance, and 73% are expecting revenue to rise in the year ahead.
Related content: Mid-Market Optimism Breaks Through Ongoing Volatility
On one hand, says Glassman, it’s natural to be more optimistic about one’s own situation. Business leaders are intimately familiar with their own companies and unique challenges, with less understanding of exactly what’s occurring across the broader economy.
Yet the data also suggests that midmarket business leaders are savvy, experienced professionals that have come out of pandemic-related volatility better equipped to weather the storms brewing today.
“The kinds of things we’re struggling with right now—increases in inflation, trying to find workers, trying to deal with supply chain bottlenecks—these are high-class problems compared to what we dealt with two years ago,” Glassman says. “Two years ago, a lot of people weren’t really sure whether they were going to be existing. It was an existential crisis.”
Today, he continues, challenges like the tight labor market are more of an opportunity to strategize rather than a threat to a company’s existence. The strain that pandemic disruption placed on midmarket companies in 2020 taught many executives to be flexible and versatile. Now, business leaders must those lessons to manage economic uncertainty, and Glassman says they’re stepping up to the challenge.
“I get this all the time from clients: ‘I know how to deal with this. I can figure this out. I wasn’t sure if I could survive two years ago,’” he says. “That was a really strong statement I heard from somebody who manages all the food service business at the airport. And it’s probably the right idea. If you can figure it out, there’s a lot of opportunity.”
I always thought that small, midsized businesses had much more upside potential if they were forced to automate, and that’s what crises tend to do.
Of course, if a recession does emerge, business leaders’ outlook could quickly dampen. With so many unknowns, some analysts predict that M&A activity is likely to take a hit, particularly in the middle-market private sector.
A recent report in MarketWatch pointed to S&P Global Market Intelligence data, which found a 30% year-over-year decline in private equity and venture capital deal volume as of last May. Ongoing uncertainty could dampen dealmaking, as “volatility makes it harder for investors to price things,” Cyndx Networks founder and CEO James McVeigh told the publication.
Even so, Glassman says middle-market optimism could keep the deal pipeline flowing. Turning some key challenges like the tight labor market and supply chain bottlenecks into opportunities to invest in technology and digital transformation could make middle-market businesses even more attractive to potential buyers.
“I always thought that small, midsized businesses had much more upside potential if they were forced to automate, and that’s what crises tend to do,” notes Glassman. “If small and midsize businesses have been going through an upgrade in the last two years, like our surveys imply, then that’s telling you that everybody is getting more efficient, and they’re figuring it out. And that makes them more attractive as a buyout candidate.”
Related content: Manufacturers’ M&A Outlook Perseveres Through Headwinds