Middle Market Outperforms, Policy Threatens Future Growth

The middle market continues to outperform other segments of the economy, but that doesn’t mean it’s without challenges. Topping the list of hurdles for midsize companies is access to qualified employees, according to RSM US LLP Chief Economist Joe Brusuelas.

“During 2017 you would think taxes and tax reform would be the No. 1 issue among middle-market clients. It’s not; it’s the labor market,” Brusuelas said. “And we have a tight, tight labor market out there in the middle market.”

Attracting and retaining workers is a challenge, compounded by the fact that employers often must turn away potential employees for a failed drug test or past felony conviction, he added during a recent conversation with MMG Editor in Chief Deborah Cohen.

The issue of labor acutely impacts agriculture. An insufficient number of visas prevents farms from hiring the migrant workers they need to produce enough food, which will likely lead to rising U.S. food prices.

While Brusuelas agreed an upward adjustment in minimum wage was warranted in several U.S. markets, a movement to push the hourly base pay above $11.50 would be detrimental, forcing layoffs by a host of midsize companies, especially restaurants and retailers, he said.

In addition to the labor market, Brusuelas and Cohen discussed trends in the manufacturing and retail sectors, the global implications of Britain’s impending departure from the European Union, and legislative and regulatory issues that will impact the middle-market economy.

The Least Understood Problem

Discussing recent health care reform efforts in Washington, Brusuelas underscored the associated tax implications that will impact the entire U.S. economy.

“It’s one of the most interesting and least understood problems with respect to tax reform and tax cuts going forward over the next six to 12 months,” he said.

He expects lawmakers will attempt to reduce the corporate tax rate and the number of tax brackets for households; they will likely also address the treatment of pass-through entities versus companies taxed as corporations, an issue of particular importance to midsize businesses. To pay for tax cuts, Brusuelas foresees an elimination of deduction on state and local taxes, which will heavily impact taxpayers in Democratic-leaning states like California, Illinois and New York.

As for regulatory changes, Brusuelas said he’s keeping an eye on potential tariffs on steel. Intended to bolster the handful of giant steel companies that remain in the country, higher prices generated by these tariffs would dramatically impact sectors heavily populated by middle-market companies.

“During this entire business cycle, the middle market is responsible in any given month for producing 60 to 70 percent of private sector job creation,” Brusuelas said. “We’re the ones driving the train, yet policy is not made for us.”

Brusuelas’ conversation with Cohen was broadcast during a live webinar on Aug. 2. Listen to the recording or register for future complimentary webinars at acg.org.