Umpqua Bank, a West Coast regional bank, released its "State of the Middle Market 2020," a national survey gauging the confidence of companies that together account for one-third of all U.S. private sector GDP. More than 500 decision-makers at middle market companies across all industries and geographic regions were polled on issues impacting their economic confidence and decision-making heading into 2020, including U.S.-China trade, stock market volatility, the labor market and interest rate environment.

Middle market companies ($10M-$1B in annual revenue) contribute roughly $6 trillion to the U.S. economy annually and employ approximately 44 million workers. Comprised of public, large private, closely held, and family-owned companies spanning all industries, the middle market sector is often the overlooked and unsung bellwether of the global economy.

"The past year has seen its fair share of disruptions and uncertainty—escalating tariffs, recessionary signals like the inverted yield curve, stock market volatility, and a slumping global economy," said Tory Nixon, Umpqua Bank's senior executive vice president and chief banking officer. "Umpqua's research indicates that the critical middle market segment of the U.S. economy as a whole remains optimistic about growth. Decision-makers are confronting the challenges associated with ongoing uncertainty head on, including the prolonged trade tensions that have made doing business in and with China more expensive for many middle market companies."

Key takeaways from Umpqua's "State of the Middle Market 2020" include the following:

• Despite economic uncertainty, middle market companies report positive outlook on 2019 economy
• While policymakers and economists expressed concern about a potential economic pullback in 2019, a strong majority (80%) of companies surveyed believe the economy has remained steady (49%) this year or even improved (31%).
• Middle market companies are cautiously optimistic about 2020 (consumer confidence being key)
• Looking ahead to 2020, the 2019 ratios hold steady, with identical levels of optimism about next year's outlook (80%). Combined with companies' expectation of increased (46%) or equal (46%) revenue levels in 2020, middle market companies appear on the whole to be cautiously optimistic about both the overall direction of the economy and the stability of their own enterprise.
• Buttressing middle market optimism in the economy is the expectation among decision-makers that consumer confidence will remain strong and even grow in 2020. Nearly half (46%) of companies expecting the economy to improve in 2020 cite growing consumer confidence as the number one reason. An increased demand for products and services follows a distant second (21%).

U.S.-China trade dispute is having a neutral or positive impact on a majority of companies

Now entering its third year, the U.S.-China trade dispute saw an escalation in tariffs in 2019. While tariffs have negatively impacted 35% of middle market companies, 50% of those surveyed report little to no impact on their business. Another 14% actually report a positive impact from the tariffs, including 32% of companies with over $350 million in annual revenue. 

Majority of middle market companies are shifting away from China, pursuing new markets
In the midst of continued uncertainty around trade, companies across all industries are proactively responding to the disruption caused by tariffs by diversifying their supply chains and expanding to new markets. More than half of companies indicate they have already or are currently in the process of diversifying supply chains internationally and/or domestically in roughly equal measure. In 2020, nearly one in five will continue pursuing new markets, with various regions of Asia and Europe topping the list of trading partners.

"As the U.S.-China trade dispute continues, we may well be witnessing a fundamental shift in how and where companies will do business in the future," said Richard Cabrera, executive vice president and head of commercial and corporate banking at Umpqua. "The fact is, trade tensions with China have forced companies to re-evaluate their market approach, which is very timely from a strategic standpoint. These companies are adapting and finding new and exciting opportunities they otherwise could have missed. The longer tariffs continue, the more likely we'll see a permanence to these market strategy changes."

In a strong economy, a shrinking talent pool poses greater risk to growth than tariffs
There are risks to growth that loom larger for middle market companies than the U.S.-China trade dispute. A historically strong job market, combined with greater restrictions on work-related visas in recent years, appears to be putting growing pressure on companies to maintain and grow their workforce as needed.

Nearly one-third of companies surveyed cite acquiring and retaining workforce talent as the most significant risk to future growth. That percentage rises to 50% for smaller middle market companies with between $10 million and $50 million in revenue and is an especially acute concern among companies in the health care industry (71%).

Significant uncertainty remains for manufacturers and retailers
While the overall impact of the trade dispute may be neutral or positive for most companies, it has created varying degrees of uncertainty and caution among decision-makers at companies in certain industries. Nearly three in four companies report uncertainty over additional tariffs. For 18% of companies, high levels of uncertainty have made planning for the next 12 months difficult. This is particularly true for manufacturers and retailers, who are disproportionately impacted negatively by trade tensions.

The full report can be downloaded at here.