United States

Five themes for middle market firms to watch in 2015


1. Broadening Growth Prospects Bode Well for Middle Market Firms

Economic growth should average between 2.5 to 3 percent through the end of 2015, which bodes well for middle market industry groups. Employment gains, which are now being driven by middle market firms, will probably continue near a pace of 250,000 new jobs added per month. The unemployment rate has declined to 5.9 percent and should slowly move toward what the Fed considers the full employment rate of 5.2 percent during the next two years.

U.S. Growth Path

Source: RSM

2. Middle Market Highly Sensitive to Interest Rate Movements

The common thread that binds middle market firms is sensitivity to interest rate movements. The Federal Reserve will probably begin a gradual and orderly rate hike campaign in 2015 that will take two to three years to unfold. While the front end of the yield curve will begin to rise in early 2015, capital flows into the U.S. related to growth and rate differentials among the major economies will probably suppress the long end of the yield curve. Given slower global growth prospects, as well as Fed policy, long-term rates should remain historically low well beyond 2015. We expect long-term rates to range between 2.7 to 2.9 percent next year, barely higher than this year’s average of 2.6 percent.

Fed Policy and Interest Rate Path

Source: RSM, Bloomberg

3. Some Industries Will Face Increased Competition for Workers

As more individuals re-enter the workforce, wages should start to modestly increase. Average hourly earnings, which have increased 2 percent on a year-ago basis, should move slowly higher toward 2.5 percent during the next 12-to-18 months. Modest employment and wage gains actually bode well across RSM industry groups because this will lead to increased consumer demand. That said, firms in manufacturing, life sciences and technology industries, which are already experiencing a shortage of skilled workers and some modest wage pressures, will probably face increased competition for workers next year.

Wage Growth, Employment Gains Should Spur Demand

Source: RSM, BLS

4. Stronger Dollar May Pose Challenges for Middle Market Firms With International Exposure

Policy divergences among major central banks, and the strong probability that growth in the U.S. will outpace the EU and Japan next year, will continue to bolster the value of the U.S. dollar. While a stronger greenback will increase the purchasing power of domestic consumers and drive down the price of imported commodities used at earlier stages of production, it will present a challenge to RSM clients in industrial products that have exposure to slowing international demand.

Stronger U.S. Dollar

Source: RSM, Bloomberg

5. Slowdown in Europe, China May Hold Back Exporters

The euro area and Chinese economies both appear to be decelerating, which will present a challenge to middle market firms that export goods. Those two economies account for $24 trillion in global GDP. Slower foreign demand will probably be most notable in the industrial products, consumer products and technology sectors. The major risk for the U.S. economy will continue to be the deflationary conditions in the eurozone. While, the ECB is ready to embark on a 1 trillion euro asset purchase program to jumpstart asset-backed securitization and prevent an outbreak of deflation, institutional, structural and policy differences among the 18 member states will make it difficult for the central bank to carry out the program successfully. 

Slower Europe, China Growth Still Poses Risk for U.S. Forecast

Source: RSM, Bloomberg


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