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Mid-Marketers Say Rising Labor Costs Are Squeezing Profit Growth

When it comes to profit margins, middle-market companies are feeling a squeeze.

Chalk it up in part to rising labor costs. In an interview with The Wall Street Journal, Lawrence Golub, CEO of Golub Capital, said most CFOs with whom he has spoken over the past few months claim their labor expenditures are on the rise, thereby compressing profit margins. Golub Capital’s Golub Capital Altman Index, which measures the meridian revenue and earnings growth of almost 200 companies in the firm’s loan portfolio, revealed that middle-markets saw a 9.1% increase in revenue in the first quarter of 2016, with earnings up by 5.1%. There are no energy earnings in the index.

Fingers can also be pointed at other factors. Among them: “Soggy external demand, problems adjusting to a period of volatility in foreign exchange markets, and the typical hangover following a full season of spending on a domestic basis,” Joe Brusuelas, chief economist at advisory firm RSM, told Middle Market Growth in an audio interview posted on the publication’s website.

The stronger U.S. dollar, too, has come into play here. Many companies in the Golub Capital Altman Index maintain operations abroad, and the strength of that dollar has reduced the value of foreign profits, Golub reported in his Journal interview. He added that even companies without foreign operations are struggling because they are still subject to import competition, and “their pricing power goes down if competitors’ costs go up.”

Brusuelas foresees an improvement in middle-market companies’ growth potential during the second quarter of this year as commodity prices stabilize. However, he cautioned middle-market players not to expect an enormous boost in their profits. Conditions, he said, still do not support a “return to profits seen during the economic recovery in the U.S.”


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