That jump was considerably larger than the 7.8-point increase that occurred in 2017, after Trump was first elected. However, it is not uncommon to see elevated optimism recede following the initial response after an election.

The survey was taken before a series of tariff announcements by the new administration raised the level of uncertainty faced by businesses. Because of this uncertainty, it is probable that the survey for the second quarter will reset lower as firms adjust their inventory levels in addition to managing their bottom lines amid rising prices for imported goods.

It is important to remember that somewhere between 40% and 45% of all imports are intermediate goods, or inputs that feed into domestic manufacturing. Those firms that rely on these goods are likely for now to absorb a portion of those costs, which will compress their margins.

Across the survey, executives’ optimism on net earnings, revenues, capital expenditures, hiring and compensation are all likely to pull back in the next quarter as firms better understand the impact of higher trade taxes, including the large reciprocal tariffs that may be imposed on April 2.

In addition, changes in the tax code and regulations are likely to evolve more slowly than anticipated, with tax legislation expected in the second half of the year, and regulatory reform evolving over the next 18 months.

The index compiled the responses of 402 senior executives at middle market firms who were asked for their outlook on the economy and business conditions. The survey was conducted from Jan. 6 to Jan. 27.

The executives’ optimism came through in their outlook for increased net earnings, gross revenues and capital expenditures over the next six months—suggesting that these respondents intended to hit the economic accelerator prior to the onset of the current bout of policy uncertainty linked to trade.  

The data

Survey participants think that the economy will improve amid reduced taxes and a lighter regulatory touch.

Nearly three-quarters, or 74%, expect the economy to improve through midyear, with 51% noting it improved in the first quarter.

For gross revenues and net earnings, which are critical to support capital expenditures and hiring, 79% and 75% of respondents, respectively, stated they expect improvement over the next six months.

Those views contrast with the 54% who noted an improvement in each category during the first quarter.

Capital expenditures among middle market firms are on the upswing, with 54% of executives saying they increased outlays on productivity-enhancing investment in the first quarter and 69% saying they intend to do so this year.

Supporting their expectations for a virtuous business expansion, 42% said borrowing conditions had improved and 43% expect them to do so in the near term. Those responses are consistent with the improvement in lending conditions over the past several months.

Half of the respondents indicated they increased hiring in the first quarter, and 67% said they would do so in the near term.

Given that the economy is at full employment with a 4% unemployment rate, this intention requires close monitoring; a move below that rate would almost certainly involve higher wages and pricing pressures for firms.

That wage pressure was clearly an issue for executives, as 58% noted that they had increased compensation to attract labor and 74% said that they would do so this year.

If there was one area of concern, it was that 66% of respondents noted an increase in prices paid and 75% stated they expect prices to continue rising in the next six months.

More than half, or 56%, of respondents said that they had passed along those costs through prices received for their products, and 68% expected to be able to do so in the near term.

Given the stubborn and sticky inflation in the economy, the nexus of full employment, an acceleration in hiring and the ability to pass along price increases to customers downstream could lead to higher inflation.

Any sustained reacceleration in inflation would result in higher interest rates out of the Federal Reserve, which would dampen the optimistic forward look in this report.