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Looking Ahead: Middle Market Trends and Projections for 2025
1.2k Plays5 months ago
In this solo episode, Doug Farren from the National Center for the Middle Market takes a forward-looking approach to 2025. He discusses key trends impacting middle market companies, including improving macroeconomic conditions, rising business confidence, advancements in technology like AI, and talent management strategies. Doug also provides insights from NCMM's latest Middle Market Indicator survey, offering projections for revenue growth, employment expansion, and innovation. Tune in for a comprehensive sneak peek at the challenges and opportunities shaping the middle market's vital role in the U.S. economy.
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Transcript
Introduction to Middle Market Trends
00:00:04
Speaker
In this episode of The Market That Moves America, instead of talking to a guest with specialized expertise and insights, we're gonna be taking a look at a preview into what 2025 looks like for the US middle market. Leveraging data from our semi-annual middle market indicator, I'll share some of the projections, insights, and trends that'll be affecting the middle market in the coming year.
00:00:33
Speaker
Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market. The center is the leading source of knowledge, leadership and innovative research on the middle market economy. Throughout our podcast, we will feature middle market leaders and stakeholders to hear their real world perspectives on trends and emerging issues.
00:00:53
Speaker
Welcome to the Market That Moves America. My name is Doug Farron, Managing Director of the National Center for the Middle Market, located at The Ohio State University Fisher College of Business. Want to wish everybody a Happy New Year and hopefully a safe and relaxing holiday season for everybody.
00:01:13
Speaker
We've got a bit of a different episode today. It'll be just me. No guess on our podcast today, but I wanted to take some time to look ahead to what the new year might bring specifically as it relates to the middle market.
Macroeconomic Stabilization Impact
00:01:32
Speaker
Of course, we'll be reviewing more detailed information from our year-end middle market indicator ah later during our NCMM webinar, as well as our podcasts that we typically put out with those results. But this will be more focused on the look forward, the projections, touching on some trends and themes that we here at the center are seeing as as vital to middle market importance for the year ahead.
00:02:01
Speaker
So as we turn the page on 2024 and enter into this new year, a few kind of general things to to keep in mind and and take note of. First of all, macroeconomic conditions, which have been troublesome for the last few years, appear to be stabilizing somewhat. We're getting, you know, interest rate decreases several times here in in at the end of 2024.
00:02:30
Speaker
And that is creating a bit more stability and certainty, certainly for companies who are looking to ah either you know take out credit, borrow, invest, those types of things. And we'll talk about that in a little bit. Of course, we just wrapped up an election. We'll have a new administration coming in ah in toward the end of January. With that will come certainly policy impacts and changes.
00:02:58
Speaker
some of which may be favorable, some unfavorable, depending on the the circumstance. But thinking about things like trade policy, immigration policy, ah the things that we're all seeing and hearing about ah will will certainly be of interest for middle market companies in in the coming year and beyond.
AI and Technology in Middle Market
00:03:17
Speaker
Next, we think about the continuing evolution of technology with AI kind of leading the way as tools continue to progress and ah and evolve and more companies start to test and figure out how these tools make the most sense for their business.
00:03:36
Speaker
Throughout all of these conditions and and circumstances, the middle market remains a steady, resilient, as well as very vital and critical piece to the US economy.
00:03:49
Speaker
Here at the NCMM, we're in our 14th year of supporting these businesses through our research, through our programs, and through the communities that we engage with throughout the year ah from coast to coast and in all different industries and and geographies and so forth. So we're proud of that work and certainly looking to to keep that work continuing here into the future.
Economic Confidence and Growth Projections
00:04:16
Speaker
So there's really going to be six areas that I want to touch on. And again, I'll be referencing some of the really the hot off the press data from our middle market indicator survey.
00:04:28
Speaker
For those who are familiar with it, every six months we survey 1000 financial decision makers at middle market companies all over the country, in different industries, in different parts of the US, ah different sizes, of course, all that data gets weighted back to the business census. And we report out on the performance as well as the sentiment and plans of ah the US middle market.
00:04:55
Speaker
So again, I'm going to take more of the forward looking view. we'll We'll be reporting out on the 2024 results through our middle market indicator report. But this is more of a sneak peek at some of the trends and projections as we see them through this data.
00:05:12
Speaker
So starting with the first kind of trend that we see, confidence. The middle market is telling us that they are more confident now than they've been in at least the past three years. Eighty four percent of companies are either extremely or somewhat confident in the U.S. economy right now.
00:05:32
Speaker
um Certainly, you know, various factors, as I mentioned here at the outset, we've got a macroeconomic environment that is improving gradually. ah New presidential administration coming in, which may be more viewed as more business friendly certainly could could affect these ah views of confidence.
00:05:56
Speaker
But it's important to remember too that these companies have been performing fairly well for a long time. And so even the slightest changes in conditions can add to that level of confidence. But again, going back for the last six waves of the MMI, we haven't seen this level of US confidence at 84% that we're seeing now. So that bodes well as we start to think about the effects of that in terms of investments um growth expansion, what these businesses are going to be doing to kind of continue um being a vital part of the economy. So growth, I mentioned that as ah being strong as we is we think about the year ahead. One of the questions in the survey we ask is to project ah the the future 12 months of both top line revenue growth as well as employment growth.
00:06:53
Speaker
For top line revenue, the projection of these companies is 8.9% top line revenue growth, which is almost a full point higher than a year ago at this time. It was closer to around 8% projected revenue growth. And then from an employment standpoint, in terms of adding employees to payrolls, that is projected to be a 9.5% increase, which is again,
00:07:18
Speaker
eight tenths of a point higher than it was one year ago. Now, if you've seen any of our webinars or podcasts or presentations even, these numbers tend to be very conservative. So in every instance, we've gone back and compared the prior year projection to the actual results, and it's almost always understated.
00:07:41
Speaker
And that's just a general characteristic of a lot of these ah companies. They tend to over promise, or I'm sorry, under promise and over deliver. So it would not surprise me if we saw results a year from now that are much higher than this. But again, these projections are stronger than they were a year ago at this time. So that just bodes well. You combine that with a very high level of confidence, higher projections,
00:08:07
Speaker
and 2025 is shaping up at this point to look like a very good year for the middle market.
Innovation and Market Expansion Strategies
00:08:14
Speaker
And so that relates to you know how is this growth actually achieved? And we track different expansionary behaviors and activities. As we think about the year ahead, some of the things that middle market companies are telling us that they plan to do are led by introducing either a new product or a new service. Almost 60% of the companies tell us that they plan to do that in the coming year. So again,
00:08:42
Speaker
with an explosion expansion of SKU count or introducing new services that creates new revenue opportunities and a chance to expand that top line. The next highest expansionary activity is expanding into new domestic markets. As we know from studying these companies for the last 13 plus years, many of them tend to tend to be very locally and regionally focused. And that presents opportunities to think a little more broadly about either expansion to different states or different regions of the country, but domestic expansion is on the minds. Again, about 57% of the company's telling us that they plan to do that. Next would be, and actually these next three really relate to how interest rates have continued to fall gradually over the last year. So the third ah greatest method of expansion is around in creating a new line of credit.
00:09:40
Speaker
So 43% plan to do that, followed by introducing a new equity investment at 41%. And then finally, adding new plant equipment, office space, kind of physical assets, so to speak, 38% of the company saying that they're gonna do that. Again, we're looking right now at ah at a Fed rate of about 4.5%. I believe I saw it's targeted to be 4.25 to 4.5, so we're we're kind of right there.
00:10:10
Speaker
And that means that these last three areas around borrowing, investment, expansion are all being influenced by rates that certainly aren't what we saw from 2012, let's say, through 2017, where it was close to zero, ah but certainly ah decreasing from where they were the past year or two.
00:10:32
Speaker
The last thing I will say about investment, we we do ask a question in the survey. If you had an additional dollar of revenue, what what would you plan to do with that? Sixty five percent. So about two thirds of the companies saying that they will invest that back into their business.
00:10:50
Speaker
and And those areas tend to differ, again, it's it's typically around technology and IT, plant and equipment, ah hiring and training. Those are always kind of the top four areas ah where that investment planning is done.
00:11:08
Speaker
So the fourth area trend to kind of to to mention and talk about a little bit is technology. Again, an area that we've been focusing on here at the center since 2019, when we produced our first report on digital transformation in the middle market.
00:11:25
Speaker
One of the things that even pre-pandemic was becoming much, much more important to these companies and somewhat regardless of industry. I mean, even if you were a manufacturer looking at things like robotics, automation, ah internet of things, and now we're starting to transition into areas like AI where, um you know, repeatable processes can be automated. Again, huge opportunities for the middle market to invest in these things to help increase productivity and lower costs.
00:11:55
Speaker
As we think about planned areas of investment in technology over the coming years, there are three big areas that stand out. The first one is around intelligence tools. So again, business intelligence, data analytics, ways to look at data more effectively ah to help make better decisions and again, drive the business. But again, all of that is predicated on having good data.
00:12:20
Speaker
And I know that's where a lot of companies can oftentimes struggle when they might have not have the internal resources to ensure that the data that they're collecting on their business is accurate and ah cleaned up and all those types of things. So a little bit of ah a disclaimer there, but again, companies are recognizing that this is a critical area for investment. Second is CRM. So customer relationship management tools being able to engage with customers, monitoring customer activity, communication, engagement, those types of things. 43% say that that was going to be their top area for investment. And then the last one is automation. So I mentioned, you know, taking tasks that are repeatable, that can be automated, partly to make them more efficient, maybe more accurate and reliable, but also to address
00:13:13
Speaker
ah The next area that I'm going to talk about, which is some of the the talent challenges and needs that are
Talent Acquisition Challenges and Solutions
00:13:18
Speaker
happening. um Certainly, we are paying attention to AI. We've asked AI questions over the last couple of surveys, and we know that it's it's a big topic for the for the middle market, so we're going to continue doing that.
00:13:34
Speaker
The next area is around talent trends. So talent evergreen issue for all businesses, but really since 2015, talent has been one of the top challenges that middle market companies are facing. So there are a number of things that these companies plan to do in 2025, both to address talent, retain talent, ah be more competitive, things of that nature. first The first,
00:14:02
Speaker
tactic is increasing incentive compensation and bonuses. For some businesses, this has been in place for many years. Others are starting to introduce it as a new tool, again, in that war to retain people and keep people.
00:14:17
Speaker
Next would be to change training requirements. That could be either to decrease some of the maybe stricter requirements for some roles. In other cases, that may be increasing training, especially as new technology tools get implemented, that'll become more important to have workers trained in in the use of all these tools and how to manage them effectively. Third would be flex and hybrid schedules. Hot topic at the onset of the pandemic.
00:14:44
Speaker
Again, very driven driven and dependent by industry, but close to 40% of the companies say that they are using flexible scheduling and hybrid scheduling with their workforce when possible. Fourth is transitioning away from employees to tech and automation alternatives.
00:15:04
Speaker
So ah again, as a lot of companies have said that finding and retaining people are one of the biggest challenges they face, the option of having a technology option to help address that is certainly being explored ah by a significant number of these companies.
00:15:21
Speaker
And then the last one, about a third of the companies say that they're going to be increasing overtime, again, as a way to address some of those employee shortages that they might have. The last thing I wanted to mention, which is somewhat interesting, is the first time in in many years Close to 60% of middle market companies say they're going to be increasing their travel budgets this year. So we don't have a ton of detail on exactly what that means. If it's visiting customers, if it's going to conferences, trade shows, conventions, those types of places where networking and ah certainly a lot of information exchange happens. But that is a number that we have not seen change much over the last couple of years.
00:16:06
Speaker
and might seem to be breaking open a little bit after you know the last four years of of maybe decreased travel than we had seen kind of pre-2020. The last area that I want to talk about today is around some of the top risks that these companies are facing as we head into 2025, and there are really three that stand out significantly
Key Risks: Inflation, Cybersecurity, and Talent
00:16:26
Speaker
above the rest. The first Despite more of the stability that we might see, a lot of companies are saying that inflation and recession remains kind of their chief concern. Still not quite sure whether we're going to get inflation fully under control.
00:16:46
Speaker
or is there still a risk of dipping into a recession? And I think most economists that I see and hear from you know think that we're in in pretty solid shape right now, but at least on the minds of business leaders, that is number one, followed closely by number two, which is cybersecurity. So the, again, the risks that emerge when increasing technology, maybe having more data in the cloud, things that need to be protected ah is certainly being recognized as as a risk that is evolving and increasing over time. And some of the work we've done in the past, you know a lot of middle market companies may assume that they're not maybe ripe targets.
00:17:31
Speaker
for either hacks or ransom attacks or things of that nature. But oftentimes they are prime ah candidates for that because they may not have the latest and most sophisticated protection. So certainly in their best interest too to make sure that they are addressing that. And then third, which I've already mentioned in terms of risk is talent shortage. So in order to support some of these strong growth rates that we're seeing and the projections that we're seeing, it's going to take people in many cases to do that.
00:18:01
Speaker
And when we look at still very low unemployment nationally, along with skill gap challenges, particularly digital and technology skills gaps, that is a risk that is that's weighing heavily on these executives.
00:18:17
Speaker
So that is, again, just kind of a sneak peek into what we are seeing for the year.
Future Research and Support Initiatives
00:18:23
Speaker
ah Here at the center, we're going to be continuing with our research platform, conducting our semi-annual MMIs, the mid-year report, which is collected in June and then the report comes out in July. And then, of course, our year-end process, which is collected in December and released each January. Along the way, we'll also be conducting different research studies in collaboration with different partners and supported by industry experts that have subject matter expertise to lend to help middle market companies make better decisions. We are also looking to introduce some case studies this year. It's a process that we've talked about for a while, but we really want to start talking with middle market companies who have successfully
00:19:11
Speaker
addressed and um solved or you know come up with solutions for some key business issues all across the spectrum, whether it be from talent to expansion to technology to operations. We're we're going to start talking with leaders of companies and and really creating write-ups of what those stories look like. And then, of course, programmatically, we still have our partnership with the Ohio Chamber of Commerce through the Fisher College of Business, where we're training middle market executives here in the state of Ohio on how to effectively build skills that can help them scale their business.
00:19:51
Speaker
and then the number of partnerships that we have around the country with different trade organizations, chambers of commerce, and really sharing the insights and thought leadership that we have um with a number of different audiences. So very excited about the year ahead, looking forward to it, looking forward to having a slate of new and very interesting and insightful guests on the market that moves America as we head into our hundredth episode, which will be happening here in 2025. And again, I want to thank our great partners and collaborators at Chubb and Visa, as well as all the support we receive across the Fisher College of Business.
00:20:33
Speaker
So looking forward to a great year. We'll look forward to talking to everybody soon. And again, hopefully these quick previews into 2025 serve as some thought starters for you as well. And again, just want to wish everybody a safe and happy 2025. Thanks and take care. Thank you for listening to The Market That Moves America. Never miss a new episode by subscribing anywhere podcasts can be found. You can also subscribe to our email newsletter at MiddleMarketCenter dot.org.