America’s best job creators are slowing down

Oct 31, 2012

FORTUNE – We’re only halfway through earnings season, but it’s clear corporate America is struggling. After seeing remarkable growth amid a shaky economy, U.S. companies expect a decline in year-over-year earnings for the first time in three years. And Sandy's economic toll certainly won't help most companies.

As big companies brace for tougher times ahead, the niche market of mid-sized firms expect trouble, too, as a blast of tax hikes and spending cuts threaten to weigh on earnings, according to a survey by the National Centre for the Middle Market at Ohio State University. This suggests another piece of bad news for the job market, given that in the years following the Great Recession, mid-sized companies created more jobs than most other companies.

In the U.S., there are 197,000 such firms. Think New York City-based Crumbs Bake Shop or Books-A-Million headquartered in Atlanta – companies with annual revenues between $10 million and $1 billion.

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Somewhere between stock-obsessed investors of big corporations and policy debates over the future of struggling small businesses, mid-sized companies often get overlooked. Hiring grew by 2.2% to about 950,000 employees during the past 12 months, outpacing jobs created by the overall economy that grew employment by 1.7%.This was helped by growth in profits, which grew by 5.5% -- more than three times higher than growth across the 500 companies listed on Standard and Poor’s.

To be sure, big companies had also seen impressive earnings. But that was largely from cutting costs and slashing jobs. What makes mid-sized firms stand out has been their willingness to hire. Most of these firms aren’t public. And so unlike big companies that have to answer to shareholders, mid-sized firms are largely sheltered from pressures of the stock market, says Anil Makhija, who heads the National Centre for the Middle Market, a partnership with GE Capital, which lends to mid-sized companies.

Between 2007-2010, about 82% of mid-sized companies survived some of the toughest economic times. That compares with 57% for small firms. Though the survival rate of big companies exceeded all others at 97%, they cut 3.7 million jobs. Mid-sized companies added 2.2 million jobs during that period.

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The trend has continued, but it’s looking less likely to last much longer, since even the strongest players can’t escape troubles weighing on the rest of the economy. Most executives at mid-sized firms worry about uncertainties over health care costs, Makhija says. More immediately, though, the looming fiscal cliff that big companies have been lobbying Washington to resolve is also eroding confidence at mid-sized firms.

Over the next 12 months, hiring is expected to grow at a slower pace of 1.3%, according to the center’s survey of 1,000 executives of mid-sized companies. Revenue growth is also forecast to slow to 3.7% over the next year, compared with 5.2% predicted earlier this year.

Mid-sized firms helped drive what weak jobs growth the U.S. has had, so it's hard to think about what might come about in the coming months.

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