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The middle market has historically been an opaque market. Now, a handful of organizations are trying to fix its fogginess by measuring changes over time with indices and indicators.

Thomas Stewart recalls an interesting predictive benchmark he once heard about Coca-Cola: When soda fountain sales rose, so would the economy. It鈥檚 not surprising that Coca-Cola would use soda fountain sales as a yardstick for the economy鈥攖he company owns roughly 42% of the U.S. carbonated soft drink market. However, Stewart, the executive director of the National Center for the Middle Market, says other organizations can find their own valuable benchmarks externally in market indices or indicators.

An index is a sampling of a market thought to be representative of the whole. All indices measure different data, businesses and markets. The two most disparate indices may be the and the , mammoths with different colored fur. The Dow is a price-weighted average of 30 large stocks featuring giant corporations such as Apple and Boeing. The S&P focuses on the stocks issued by 500 large companies with market capitalizations of at least $6.1 billion. Despite sample-size differences, both are trusted and used as indicators of U.S. economic growth. 

Small businesses have indices, too, including Wells Fargo鈥檚 Small Business Index and the National Federation of Independent Business鈥� Small Business Economic Trends. All indices track performance changes over time. The most useful indices can serve as a litmus test for a company鈥檚 chunk of the economy.

For example, a home-improvement retailer like Home Depot would likely find Coca-Cola鈥檚 benchmark useless, but it may find value in a benchmark like the . An increase in this index could mean an incoming economic boom, while a dip may mean an impending economic tumble.

Measuring the Middle

The range of companies in the middle market is dispersive. Middle market companies can manifest in industries as dissimilar as retail, manufacturing, legal services or computer equipment. Also, despite the name 鈥渕iddle market,鈥� the sector comprises a large chunk of the economy. The National Center for the Middle Market has reported that the middle market employs 47.9 million Americans and composes roughly one-third of the private sector鈥檚 GDP. Private companies don鈥檛 often report exact sales and revenue numbers, opting instead to give a revenue range. The variety of industries in the middle market makes it hard to take a well-proportioned snapshot of the market as the S&P 500 can do among large businesses.

These factors converge to make measuring the middle market akin to guessing the number of jelly beans in a jar. However, multiple organizations are now trying to clearly measure the market and give executives a predictive benchmark.

surveying 1,000 middle market C-suite executives and tracking revenue growth, employment growth and confidence levels. Stewart says he dreams that the report鈥檚 short-term index will soon have predictive value. 鈥淭he holy grail for an index is to create something that actually becomes leading,鈥� Stewart says. 鈥淚 don鈥檛 know that anybody has that. We are hopeful, but it鈥檚 a tricky business.鈥� Still, NCMM鈥檚 index, which is within its Middle Market Indicator, is only two years old and not yet predictive鈥攊t鈥檚 hard to know if it ever will be, Stewart says, but the NCMM is currently testing, laying new numbers over the old ones to see how they match up.

A pair of University of Chicago professors are also hopeful that their new index can make the middle market less opaque. , a middle market investment bank, recruited Steve Kaplan, professor of finance and entrepreneurship at the University of Chicago Booth School of Business, and Mike Minnis, an associate professor of accounting at Booth, to create a quarterly index using data from the bank鈥檚 portfolio. 鈥淭hey thought they had better data than other folks who were trying to measure the middle market,鈥� Kaplan said. 鈥淭hat鈥檚 why Lincoln was interested, and that鈥檚 why we worked on it. We could see there was value there.鈥� 

Each quarter, Kaplan and Minnis construct an index using values from . They believe that the variety in this index makes it more like public stock indices (like the S&P 500) than other middle market indices. Even so, clear measurement in the middle market is still hard to perfect: Kaplan and Minnis acknowledge that this index has fewer tech and financial companies than the overall economy. 

In addition to NCMM鈥檚 and Lincoln鈥檚 reports, other companies have tried to create their own middle market benchmarks. These include the Golub Capital Middle Market Report, the and conducted with the U.S. Chamber of Commerce. Each of these five indices uses its own set of data: RSM鈥檚 and NCMM鈥檚 reports are based on surveys of middle market executives. Lincoln鈥檚 report is a smattering of valuation data from middle market organizations. Golub鈥檚 report examines 150 privately owned companies in the Golub Capital loan portfolio. American Express鈥� report examines a six-year period of Dun & Bradstreet鈥檚 commercial databases. Although none can perfectly predict the vicissitudes of the middle market, all aim to find a stable measure to give middle market executives a focused vision into their ever-opaque industry.

Why Read Indices?

Stewart, Kaplan and Minnis all agree that executives can find tidbits of information in indices and indicators that could serve as benchmarks for their company, just as Coca-Cola executives found fountain drink sales to be their predictive benchmark.

Stewart says niche indices鈥攖hink Home Depot looking at the homebuilder index, or perhaps a car dealer reading Manheim鈥檚 Used Vehicle Value Index鈥攃an alert marketers to whether customers are expansive and ready to spend or downtrodden and too nervous to open their wallets. This may give marketers a modicum of empirical evidence necessary to decide what the tone and style of their campaigns should be.

鈥淵ou might think about where you鈥檙e going to put your marketing, what kind of marketing to do and what message you鈥檙e going to send,鈥� Stewart says. 鈥淚 suppose all of us could and should be informed by where your audience thinks the economy is going.鈥�