Inflation still a top concern for middle market businesses, alongside labor and healthcare costs

Measuring the prospects for their own businesses, nearly three-quarters (73%) of business owners and executives reported an excellent or very good company outlook for 2024. This level of confidence remained steady throughout 2023. Business leaders in the South (79%) and West (77%) regions were the most optimistic, and positive sentiment in the Midwest jumped 6 percentage points between Q3 and Q4. Eighty-four percent of survey respondents in the construction industry reported an excellent or very good company outlook for 2024.

Executives in manufacturing and retail reported contrasting trends in their perceptions of the economy and their own businesses. The number of business leaders at manufacturing firms with an excellent or very good outlook for the U.S. economy increased 5 percentage points between September and the end of 2023, from 46% to 51%. But the number who cited a positive outlook for their own businesses decreased by 9 percentage points to 67%. In retail, the opposite trend emerged: Fewer retail business owners and executives expressed positive sentiment about the overall U.S. economy at the end of the year (51%, compared to 57% in September), but slightly more were optimistic about their own businesses than in September (71% versus 69%).

Among business leaders with a positive company outlook, the top two contributing factors were improvements to operational efficiency and technology, both cited by more than half of respondents. Forty-three percent reported that their ability to attract and retain talent was a positive factor, and the number of respondents who cited improvements to cybersecurity increased 9 percentage points to 40%.

Is an economic downturn looming, or did it already happen?

Despite their generally positive outlook about their own companies’ prospects, most middle market business leaders see an economic downturn on the horizon — and during the fourth quarter of 2023, the number who believed the economy was already in a downturn increased from 17% to 24%.

How do these business owners and executives define a downturn? When asked which metrics they most associate with the phrase “economic downturn,” the top two responses were high interest rates (cited by 45%) and high rates of inflation (41%). Fewer respondents said they define a downturn based on factors related to their own business performance, such as poor or low business profit growth (24%) or poor or low business revenue growth (22%).

Given their focus on interest rates and inflation, it makes sense that nearly a quarter (24%) of middle market business leaders surveyed in late 2023 believed the U.S. was already in an economic downturn. Looking ahead, another 60% expect the next downturn to occur before 2025. Of those anticipating a downturn, 64% anticipate it will have a negative impact on their businesses, down slightly from 69% in September. But business leaders with a positive 2024 company outlook were much less worried at the end of 2023 than in the prior quarter: Just over half (51%) anticipate that the next economic downturn will negatively affect their businesses, an 11-percentage-point drop since September.

Predictions about when a downturn will hit vary by region. More than a third of respondents in the Midwest (39%) expect a downturn to occur within the first half of 2024, compared to 31% of respondents overall, and 37% of those in the Northeast anticipate a downturn in the second half of 2024 (compared to 29% overall). Finally, 26% of middle market leaders in the West surveyed do not expect a downturn to happen before 2025, compared to 16% overall.

Leaders are taking steps to prepare. In response to a potential economic downturn, nearly half of middle market business leaders — including 57% of those with a less positive company outlook for 2024 — have prioritized improving operational efficiencies and productivity. Almost a third (29%) of respondents with a less positive company outlook also reported enacting hiring freezes to safeguard against an economic downturn, compared to only 19% overall. Meanwhile, 39% of companies with a positive 2024 outlook reported searching for alternate or low-cost suppliers, an increase of 10 percentage points over the previous quarter. Notably, companies with a more positive outlook are also more likely to be taking steps to shore up their capital positions, including increasing business savings and liquidity (33%), investigating alternative forms of capital and funds (27%), and increasing their lines of credit (25%).

In response to inflation, 38% of business leaders plan to increase their sales and marketing efforts to generate more revenue during the first half of the year. Just less than one-third (31%) of respondents plan to increase automation to improve productivity. However, that percentage climbed to 39% among business leaders who have a less optimistic company outlook for 2024. An increasing number of respondents said their companies plan to increase R&D efforts (24%) and carry excess inventory (23%) due to inflation.

Fewer executives are concerned than they were in the previous quarter about the future effects of higher oil and gas prices and their ability to attract and retain talent. Meanwhile, concerns about the costs of labor, healthcare, and rising interest rates are emerging as watchpoints for 2024.