As the end of 2023 approaches, middle market business leaders are maintaining a steadfast sense of confidence in their own companies despite geopolitical conflicts around the world, political turmoil at home, and a generally lackluster outlook on the overall United States economy. Recently, KeyBank surveyed 400 owners and executives of businesses with $10 million to $2 billion in annual revenue to better understand their perspectives, predictions and plans. 

Confidence at the company level, skepticism about the U.S. economy

About half of the middle market business leaders KeyBank surveyed in September (47 percent) characterized their outlook on the overall U.S. economy as very good or excellent. Those with distinctly more favorable perspectives on the overall economy include businesses with revenue of $250 million to $500 million (63 percent) and those in the retail sector (57 percent). At the other end of the spectrum, those with $10 million to $25 million in annual revenue (34 percent) and in the health care industry (35 percent) were among the least likely to express optimism about the U.S. economy. Meanwhile, just over half (53 percent) of middle market leaders surveyed are expecting an economic downturn sometime in 2024.

When it comes to their own businesses, however, the response is much more upbeat. For the past four consecutive quarters, at least 70 percent of middle market business owners and executives have characterized the overall outlook for their companies’ financial performance as excellent or very good.

Since the beginning of 2023, sentiment trended upward most significantly in manufacturing (from 68 percent in March to 76 percent in September) and transportation (from 58 percent in March to 76 percent in September). More business leaders in the South (83 percent) and West (77 percent) regions also reported a strong company outlook, whereas in the Midwest, sentiment is trending downward—from 78 percent positive in March to 63 percent positive in September.

Investing in growth and exploring AI

It should come as no surprise that many middle market business leaders are focused on expansion, given their positive outlook. Over the past six months, 66 percent of those with a positive company outlook have increased funding plans to invest in or expand their businesses. Nearly half of those surveyed (47 percent) plan to add employees, 46 percent will make process improvements, and 40 percent will introduce new products.

Moreover, the number of middle market businesses planning to expand or renovate their current facilities increased significantly throughout 2023, from 25 percent in March to 36 percent in September.

Technology will play a major role in 2024 growth plans. Half of business owners and executives surveyed will expand their use of technology or automation over the next six months—and among companies at the larger end of the middle-market spectrum (revenue between $500 million and $2 billion), that figure increases to nearly two-thirds (63 percent). Middle market business leaders are also exploring opportunities around artificial intelligence (AI): 42 percent overall and 63 percent of those in the higher revenue category plan to implement AI for combating fraud, analyzing data and automating simple tasks. These leaders identify a wide variety of benefits emerging from AI adoption, including faster and more accurate customer service, improved productivity and better decision-making.

Inflation remains a top challenge, but some business leaders report silver linings

The top three challenges currently negatively impacting middle market businesses are the overall increase in inflation (46 percent), higher labor costs (35 percent) and higher energy costs (32 percent).

While inflation continues to top the list of current concerns, business leaders are divided about its overall impact on their organizations over the past six months. Thirty-two percent report that the positive impacts of inflation outweighed the negative, 30 percent said the positives were equal to the negatives, and 33 percent said negative impacts outweighed the positive. Higher numbers of middle market business owners and executives in the retail sector reported positive effects of inflation (44 percent), as did those with revenues above $250 million (42 percent). Among business leaders who reported positive effects of inflation, 51 percent cited the ability to increase prices, 44 percent cited increased incentives for the business to spend or invest, and 43 percent named increased customer spending as a primary benefit.

Attracting and retaining talent is harder for some businesses than others

Turning to people issues, nearly half of middle market business owners and executives report that their growth plans include adding more employees to their workforces over the next six months. Forty-one percent of survey respondents expect finding talent over that period to be easy or very easy. Positive sentiment about talent acquisition is more prevalent among those with a positive outlook on the U.S. economy (67 percent), from firms with $500 million or more in revenue (55 percent), and in the construction industry (51 percent). Conversely, 39 percent of middle market business leaders anticipate finding talent to fill their open positions will be difficult or very difficult. This is especially true in the Midwest (55 percent), in the health care industry (50 percent) and for companies with revenue in the $25 million-$50 million range (50 percent).

This quarter, the top method for attracting talent among business leaders who anticipate hiring challenges is implementing or enhancing health and wellness benefits. More than half (53 percent) reported taking this approach in September, a significant increase from 41 percent in June. The number of respondents offering job training and educational benefits as a means to attract new workers is also on the rise, at 34 percent from 29 percent previously.

Fewer middle market business owners and executives are concerned about retaining their existing talent than attracting new workers. Among the 20 percent who anticipate challenges in this area over the next six months, improving the competitiveness of wages and salaries is the most cited method for talent retention (56 percent versus 45 percent last quarter). The number of respondents who are enhancing their efforts to create a safe working environment at company offices and physical locations is also on the rise, from 21 percent in June to 31 percent in September.

Concerns mount about access to capital and credit

As interest rates remain elevated, concerns about higher borrowing costs are on the rise—especially in the near term. As of September, higher borrowing costs were tied with higher oil and gas prices as the top issue expected to negatively affect middle market businesses’ bottom lines during the fourth quarter of 2023.

Twenty-four percent of middle market business owners and executives anticipate higher borrowing costs to negatively impact their businesses within the next 12 months, compared to only 15 percent in the second quarter. Of those respondents, more than half (52 percent) expect it to be a problem in the next three months and 83 percent anticipate a negative impact on their bottom line within the next six months. In response, middle market business leaders are exploring new sources of capital and credit, including private equity firms (55 percent), commercial lenders (46 percent) and the use of multiple banks (43 percent). In the current rate environment, business leaders may benefit from reviewing and updating their liquidity strategies.

Persevering through ongoing volatility and uncertainty

The year 2023 has imposed a host of challenges on middle market businesses—and between a potential downturn, ongoing geopolitical conflict, and what promises to be a tumultuous election year, it looks like uncertainty and volatility will continue in the year ahead. Yet in the face of these challenges, middle market business leaders are maintaining their resolve, managing for growth and making plans to expand. This vital segment of the economy has proven its resilience in recent years, and the optimism shown by many middle market business owners and executives seems warranted as they approach 2024.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. KeyBank is Member FDIC.© KeyCorp 2023 CFMA #231129-2350783