Prairie Middle Market Perspective Summer 2022

Any comparisons this year to the extraordinary 2021 M&A market, with record levels of middle-market and global deal activity, was likely to be disappointing even without significant economic, political and social headwinds. First quarter 2022 M&A activity was down about 35.0% from the fourth quarter of last year with our preliminary 2Q22 data indicating a continued softness in the second quarter M&A activity as well. Record inflation, labor shortages, lingering supply chain issues and inflation combating interest rate increases are all taking their toll on the psyche of both the consumer and the business owner. Clearly, there is a growing lack of confidence in the country’s leadership and their ability to focus on the real issues that matter to the consumer and middle-market business owners.

The National Federation of Independent Business (“NFIB”) Optimism Index fell for a sixth consecutive month in June. Business owners’ expectations for better business conditions over the next six months decreased to a net negative 61.0% as well, the lowest level ever recorded by the 48-year-old survey. As part of this report NFIB Chief Economist Bill Dunkelberg stated, “As inflation continues to dominate business decisions, small business owners’ expectations for better business conditions have reached a new low. On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations.”

Further, the July 5th Monmouth University Poll of Public Opinion indicated that a record 88.0% of Americans believe the U.S. is on the wrong track, with inflation, gas prices and the economy cited as the top concerns. In addition, The University of Michigan June 2022 Index of Consumer Sentiment produced the lowest reading on record. The Consumer Sentiment survey indicated that 79.0% of consumers expect bad times in the year ahead for business conditions. The consumer drives about 70.0% of the U.S. economy, so when consumers are unhappy the economy is unhappy, and that is where we are today.

The U.S. Commerce Department noted that consumer spending was down in the second quarter of 2022, which led to reductions in second quarter GDP estimates by many economists, including the Atlanta Fed. The Atlanta Fed’s GDPNow Tracker, which is a fairly accurate predictor of GDP, currently estimates second quarter GDP at a negative 2.1% which, when combined with the first quarter GDP of a negative 1.6%, will put the U.S. economy in a technical recession. Then, it will be up to the National Bureau of Economic Research to declare a “formal” recession, something that they have always done with two consecutive quarters of negative GDP. The actual second quarter GDP will be released on July 28th, so stay tuned.

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