Middle market business leaders brace for economic downturn in first half of 2023

When KeyBank surveyed middle market business leaders in September 2022, they expressed optimism despite ongoing economic uncertainty: 78% reported that the outlook for their businesses was either very good or excellent. But by the end of the year, that optimism was waning. In KeyBank’s December survey of 400 owners and executives of businesses with $10 million to $2 billion in revenues, respondents revealed greater apprehension about the outlook for their companies over the next 12 months and expressed the lowest outlook for the broader U.S. economy since the first quarter of 2021. With inflation, supply chain disruptions, higher energy costs and other factors exerting pressure on middle market businesses, many are working through significant challenges in 2023.

Outlook tumbles for individual companies and broader U.S. economy

Seventy percent of middle market business leaders said the outlook for their companies over the next 12 months is very good or excellent — a decline of eight percentage points since September. Confidence in the overall U.S. economy dropped even more sharply, from 61% characterizing the outlook as excellent or very good in September to only 47% at year-end.

Between the third and fourth quarters of 2022, company outlook decreased most sharply among middle market business owners and executives in the construction (87% to 78%) and manufacturing (79% to 73%) industries. Geographically, the West region experienced a 17-point drop in positive company outlook, from 83% to 66%. And in terms of company size, optimism is waning the most at companies with revenues between $10 and $250 million: Just over two-thirds (68%) of these business leaders report an excellent or very good outlook for their company’s next 12 months, down from 76% in September. The factors contributing to this shift toward a more pessimistic outlook will not come as a surprise: Inflation, high energy costs and supply chain disruptions were the three most commonly cited issues having a negative impact on the middle market.

Middle market business owners also expressed less confidence in the current state of the broader U.S. economy. Fewer than half characterize their U.S. economic outlook as excellent or very good — a general sentiment on par with the beginning of 2021, when companies were dealing with COVID-19, concerns about tax rates and fears around a potential recession. The retail, transportation and construction industries reported the largest downward shifts in economic outlook, with transportation feeling the least optimistic: Only 33% have a very good or excellent outlook. Smaller businesses and those in the Northeast and West regions also reported diminishing confidence in the U.S. economy. In the West, 78% of businesses had a positive outlook in September, and as of December, only 43% did — a staggering 35-point drop.

While their outlook has dimmed both at the macroeconomic level and for their enterprises, middle market business leaders continue to be more optimistic about their own companies than the overall U.S. economy. And among the 70% of middle market businesses where company outlook is still definitively positive, almost all (94%) are anticipating moderate to significant revenue increases in the next 12 months.

Inflation remains top of mind

When it comes to middle market business leaders’ biggest concerns, inflation continues to outrank energy prices and supply chain disruptions. The percentages of survey respondents who indicated that each of these three factors is currently having a negative impact on their businesses were as high or higher in December than at any other point in 2022, and at least a third anticipate negative impacts on their businesses as a result.

Concerns around healthcare costs and cash flow are also trending upward, reaching all-time highs at the end of 2022. Thirty percent of middle market business owners and executives named the rising cost of healthcare as a current concern, and 21% expect cash flow concerns to have a negative impact on their business over the next 12 months. This uptick in concerns around future cash flow was more pronounced among businesses with a positive company outlook, increasing eight percentage points between September and December. Among business leaders with a more neutral or negative company outlook, concerns about energy costs and operational limitations caused by labor shortages increased the most sharply (15 and 17 percentage points, respectively).

For middle market businesses, a “return to the unprecedented.”

Persistent inflation and the resulting increase in interest rates, supply chain disruptions, elevated energy costs and labor shortages have all contributed to a decline in optimism among middle market business leaders. While most are still confident about their companies’ prospects in the year ahead, they are also clear-eyed about the challenges they will need to navigate to keep their businesses operating smoothly.

Talk with your banker about ways you can help your business navigate periods of uncertainty. They can provide strategic solutions to any issue your business faces, including efficiently managing and maximizing cash flow.

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 #230405-2008182

Headshot of Michael McCuen

Michael McCuen

Market President and Commercial Sales Leader, KeyBank in Cincinnati


About the Goering Center for Family & Private Business

Established in 1989, the Goering Center serves more than 400 member companies, making it North America’s largest university-based educational non-profit center for family and private businesses. The Center’s mission is to nurture and educate family and private businesses to drive a vibrant economy. Affiliation with the Carl H. Lindner College of Business at the University of Cincinnati provides access to a vast resource of business programming and expertise. Goering Center members receive real-world insights that enlighten, strengthen and prolong family and private business success. For more information on the Center, participation and membership visit goering.uc.edu.

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