Published in Finance

Don’t discount manufacturers, even as service sector matures

BY Sunday, March 06, 2016 02:45pm

As the service sector rises, Julie Weeks says don’t forget manufacturing.

The two sectors need each other, said Weeks, an adviser for American Express who’s based in Traverse City.

She recently authored a report that affirms the nation’s steady move to a service-based economy in the middle market, a part of the economy that encompasses those businesses with annual sales between $10 million and $1 billion.

The American Express report also serves as a reminder not to overlook U.S. companies in the middle market, which consists of 163,603 businesses, up 4.4 percent from 2008 to 2014. The sector directly employed nearly 50.2 million people combined and generated annual revenue of $6.12 trillion.

“Middle market firms, even though they’re small in number, are mighty in terms of job creation and economic growth,” Weeks said.

One finding of interest in the report, which uses data from Dun & Bradstreet, is that service companies formed in the last decade tend to grow and scale up into the middle market faster than industrial firms, Weeks said.

“The service sector, especially business services, is really where the next generation middle market firms are growing. That’s a sector to pay a lot more attention to,” Weeks said.

Her comment echoes one of the arguments used in December to enact legislative changes in state tax law to benefit data centers in Michigan. The move was driven by Nevada-based Switch Ltd.’s plans to invest $5 billion over a decade into a cloud-based data center near Grand Rapids that would support 1,000 jobs.

Amid the rise of the service sector, Weeks cautions that people should avoid looking to the American Express report for any reasons to dismiss or diminish manufacturing as an economic force. It’s quite the opposite, because the fortunes of the two sectors, after all, are tied together, Weeks said.

“Manufacturing is still a pretty foundational part of the middle market. Even though economy-wide it’s a sector that is not growing, it is still very important to the businesses that are scaling up into the middle market,” Weeks said. “One of the things that I would take away from this is, let’s not forget about manufacturing. It’s still a very important part of businesses that are employers and are scaling to that level.”

One indicator of the growth in the service sector is that service companies tend to be younger.

More than any other sector, business services account for a higher number of middle-market companies that are less than 10 years old (17.1 percent) or that are 10 to 29 years old (17.8 percent), according to the American Express report.

Perhaps as a testament to their staying power, manufacturers tend to be older companies. They account for the largest percentage of the oldest companies in the middle market, with 19 percent between 30 and 49 years old and 16.1 percent more than 50 years old.

In Michigan, 9 percent of the 4,749 companies in the middle market as of 2014 were less than 10 years old, versus 11 percent nationally. Thirty-five percent of middle market companies in Michigan are 50 years old or older, compared to 30 percent nationally, a difference that Weeks attributes to presence of older automotive suppliers in the state.

The lower-than-average percentage of middle-market companies in Michigan that are less than 10 years old may stem from the hard hit Michigan took during the recession that limited business startups, as well as years of population loss that only recently began to flatten out.

And although Michigan economically “is doing a lot better than we have been, that’s for sure,” when you’re not growing population, you’re typically not growing new businesses, Weeks said.

“The northern tier of states all across the country are not growing in terms of population, and when you have demographic factors like that in play, that has an impact on the business climate and business formation because businesses need customers,” she said. “The southern part of the United States is where there’s growth in population. When you’re looking at rankings at states in terms of growth in the number of businesses and other factors, they are the ones that are growing.” 

Read 4650 times Last modified on Thursday, 10 March 2016 10:40