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Middle market enters expansion mode after one year of pandemic impacts 

In its second quarter 2021 survey, KeyBank asked 400 owners and executives of middle market businesses — defined as those in the $10 million to $2 billion range — how macroeconomic conditions and government policies have impacted their businesses.

The survey found that the middle market is back to growth mode one year after a COVID-challenged 2020. Having made necessary adjustments to their businesses amid the market turmoil, middle market business owners are happy to be once again identifying expansion opportunities.

As they embrace growth mode, they’re being met with a competitive employment environment and a flourishing mergers and acquisitions (M&A) marketplace.

Scott Schlange

Continuing a positive trend identified in the first quarter 2021 survey, outlooks at the company, state and national levels have all become even more optimistic. At the company level, 40% of respondents identified an “excellent” outlook — compared to 31% in Q1, and another 41% had a “very good” company outlook. At the state and national levels, both “excellent” and “very good” outlooks have increased, climbing to 68% total for the state economy and 61% total for the U.S. economy, up from 51% and 41% respectively.

Since late January, middle market business leaders have become increasingly optimistic about the overall health of their businesses than they were amid COVID-19 concerns during 2020. In the second quarter survey, 71% say they felt very or somewhat positive compared to 48% in Q1. More than 80% of middle market business executives now feel the development of the COVID-19 vaccine somewhat or very positively affects the outlook for the overall health of their businesses.

Buoyant business sentiment is mirrored by a continued rise in consumer confidence in the United States, which, according to a recent Marketwatch article, denotes a “more upbeat view on both current conditions and expectations amid a better health situation and an improved job market.”

For the minority of middle market executives who expressed a low outlook on the U.S. economy, all is not rosy. For 61% of respondents who have a good, fair or poor outlook on the U.S. economy, COVID-19 continues to be the primary reason for concern, but the prominence has been decreasing since September 2020, and especially so recently. Additional factors for pessimism include potential higher tax rates (51%) and most recently, the higher cost of raw materials (49%).

Supply chain challenges due to the pandemic, severe weather events globally and the Suez Canal blockage have caused price volatility with not only raw materials, such as steel, but also consumer goods prices, which, according to a report in the Wall Street Journal, hit a peak in June. However, economists and the Federal Reserve Chairman Jerome Powell expressed belief that the supply chain would normalize and inflation would be “transitory.”

Despite some continued uncertainty, middle market executives are overwhelmingly ready to act on their optimism and hire more people. Since late January, plans for expansion have significantly increased to 77% from 63% in Q1. And the primary method for expansion is adding employees, at 79% of those who plan to expand.

Middle market businesses are seeking primarily to add skilled workers (30%) or professional workers (22%) versus unskilled workers (17%) and are running into difficulty filling these positions as the U.S. labor market recovery accelerates. More than 60% of executives surveyed said when it comes to hiring skilled workers, limited availability of qualified workers is their most common challenge.

The rise of remote work means companies are now in competition for employees with companies across the nation, not solely in their region. And, desirable candidates are taking advantage of the demand for skilled workers to relocate, change job tracks and demand new incentives, a trend Business Insider has dubbed “The Great Reshuffle.”

The publication cites research from economists at Arizona State and Virginia Commonwealth that shows one in four Americans works for a different employer than before the pandemic.

Beyond expanding by adding employees and physical space, many middle market executives are exploring growth through acquisition. Since late January, acquisitions are becoming more likely: 71% of respondents have completed or strongly considered an acquisition in the past six months, and 64% say they are extremely or very likely to complete an acquisition in the next six months.

One year after the most impacted quarters of a tumultuous 2020, middle market business leaders have emerged with confidence in how their companies persevered and optimism about the future. However, while concerns about the pandemic recede, concerns about tax hikes and supply prices emerge.

As your company considers expanding workforce, facility or major equipment upgrades, M&A or other capital-intensive priorities, having a trusted advisor attuned to your goals is invaluable. Your bankers can provide exclusive insights and real-time support that is crucial to your business.

 Scott Schlange is the Commercial Banking sales leader with KeyBank in Idaho. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank is Member FDIC.

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