Middle-Market Optimism Should Remain Steady Despite Washington’s Political Jams, Says KPMG’s Hughes

As the U.S. government awkwardly sweated its final hours before spiraling into a frustrating shutdown, KPMG LLP injected business wires with a dose of middle-market economic optimism recently when it released the findings of its 2013 Mid-Market Outlook Survey. Revenue, hiring, and capital spending are all on the rise, according to its findings. MME spoke to Brian Hughes, KPMG partner and national leader of the firm’s Private Markets Group, about whether the shutdown could temper such newfound middle-market confidence.

MME: These findings seem to be rather bullish when it comes to the economic outlook. Optimism in the middle market is growing?

Hughes: I guess that’s right, when you compare it to where optimism was in the prior year, especially if you were to focus on revenue, where 73 percent of middle-market firms reported an increase in revenue over the previous year, compared to the prior year, when only 58 percent reported an increase. More important, looking forward into 2014, over 78 percent of middle-market business leaders told us that they expect revenues to rise in 2014, so there is definitely a sense of bullishness. There are other signs. All that you have to do is look at your 401(k), and of course the stock market has been having a stellar year.

MME: What impact do you think the government shutdown is likely to have on this newfound optimism?

Hughes: I think that any time the government has had a shutdown, they have always reimbursed the employees who were furloughed, and as you may know, they haven’t furloughed the entire government. It will be a short-term blip. I think that everyone expects for this to get resolved, and it should not have an effect on the economy. Now, longer-term, we still have issues that need to be addressed in the economy, including Dodd-Frank and the Affordable Care Act, which is of course the law that has led to the shutdown, as some have tried to delay the implementation of Obamacare. I’m not sure that we can turn this off — these are things that businesses still need to address.

MME: Middle-market firms tell us that they are still very cautious when it comes to making a hire …

Hughes: Well, we learned that 45 percent of business leaders in the current year expect to increase head count, and looking forward into 2014, 55 percent expect to increase head count. I’d still say that’s pretty strong, and while companies are looking to improve efficiencies, you don’t always have to add a lot of cost to drive revenues. One of the ways you do that is with IT. When you look at areas where companies are looking at potentially spending money, IT is at 31 percent — and in particular, cloud and data analytics, which can really help firms to transform their business, run it more efficiently, and also supply better data, which can help to drive top-line revenue growth.

MME: The study appears to make it clear that M&A activity is picking up …

Hughes: We found that more than 54 percent of middle-market firms expected to be involved in some sort of M&A transaction in 2013, and that was an uptick from last year. Our corporate finance people would tell us that they were optimistic as far as M&A picking up went, but we have really not seen it to date in the marketplace. Now, we saw it at the end of 2012, in part driven by the tax laws which were due to change on January 1. In the current market, we see executives talking about it, but there seems to be a difference between a buyer and a seller in terms of valuation, with the seller trying to maximize value and the buyer trying to lower the purchase price. But we see this gap narrowing and more transactions coming to fruition down the road.

MME: Here, too, we would suspect that the government shutdown could curtail some added luster around M&A …

Hughes: Well, there are a lot of variables, but if you were to tell me that the government shutdown gets straightened out, the debt ceiling gets raised, and Obamacare moves forward, I would say that there is still reason to be optimistic. Now, if there is some other unforeseen event outside our borders, whether in Europe or Asia, all bets could be off. But Europe appears to be having an improving economy, and we see companies sourcing more manufacturing from the U.S., so again there are additional reasons to be optimistic.