Middle Market Businesses Less Optimistic For First Time Since Election
RSM US Middle Market Business Index declines as business leaders cite doubts on policy reform
The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, today announced the index declined in Q3 2017, following a record-high reading in Q2 2017. The decline comes after three consecutive quarters of growing business optimism in the middle market, indicating improvement during the past year was likely the result of stronger economic fundamentals and the recovery in corporate earnings predating the 2016 presidential election.
The data and corresponding survey questions indicate middle market leaders are still experiencing strong economic and business conditions, but may pull back on some investments due to the lack of progress on substantial policy reform. While optimism on whether infrastructure spending will occur in the next two years has receded, middle market leaders report it would have a positive impact for businesses.
In Q3 2017, the MMBI posted a composite score of 125.7, down 6.4 points since Q2. While the decline erases much of the bump in middle market business optimism following the election, it is still more than 10 points higher than Q3 2016. A reading above 100 indicates an expanding middle market.
Optimism on Infrastructure Spending Remains
Despite waning overall business confidence, the U.S. middle market remains hopeful about the potential for infrastructure spending and enthusiastic about the benefits such projects will bring to their business. More than 70 percent of middle market business leaders believe that investment in telecommunications networks (including security of these networks), roads and highways, the national energy grid, bridges, viaducts and overpasses, airports, and water and sewer systems would improve their day-to-day operations. In addition, more than 65 percent of these business leaders believe that improvements to telecommunications networks (including security of these networks), roads and highways and the national energy grid would represent opportunities for their business, and 59 percent of those who ranked one or more items as a significant opportunity would plan to participate in the bidding process for those projects.
Tight Labor Market Creating Headwinds for Hiring
When it comes to business planning, the MMBI showed executives remain optimistic but are hesitant to commit to certain investments. More than half reported improved gross revenues, and 65 percent anticipate an improved gross revenue outlook in the next six months. However, fewer executives reported improvements in hiring conditions this quarter over last, pursuant to challenges of an extremely tight labor market. Nearly three in four reported trouble filling skilled positions. And while 56 percent of respondents expected to increase compensation in the Q2 2017 report, only 40 percent reported they did this quarter, and less than half plan to in the next six months.
“Despite widely reported hiring challenges across many business sectors, MMBI results show the middle market has continued to expand and is generally reporting a positive outlook for the year ahead,” said RSM US LLP Chief Economist Joe Brusuelas. “However, the real economy is also sending a message to Washington that they need a clearer picture on the policy front before making key decisions around hiring, compensation and capital expenditures – all of which can make a significant impact on the U.S. economy.”
“We’re counting on Congress to pass tax reform and continue advancing a pro-growth economic agenda that will grow middle market businesses, and the broader business community,” said U.S. Chamber of Commerce Middle Market Business Council Executive Director Tom Sullivan. “The U.S. Chamber will continue to advocate for the reforms and polices that address the challenges these businesses face and encourage business investment, accelerated growth, and job creation.”
The survey data that informs the index reading was gathered between July 7 and August 4, 2017. To learn more about the middle market and the MMBI, visit the RSM website.
About the RSM US Middle Market Business Index
RSM US LLP and the U.S. Chamber of Commerce have partnered to present the RSM US Middle Market Business Index (MMBI). It is based on research of middle market firms conducted by Harris Poll, which began in the first quarter of 2015. The survey is conducted four times a year, in the first month of each quarter: January, April, July and October. The survey panel consists of 700 middle market executives and is designed to accurately reflect conditions in the middle market.
Built in collaboration with Moody’s Analytics, the MMBI is borne out of the subset of questions in the survey that ask respondents to report the change in a variety of indicators. Respondents are asked a total of 20 questions patterned after those in other qualitative business surveys, such as those from the Institute of Supply Management and National Federation of Independent Businesses.
The 20 questions relate to changes in various measures of their business, such as revenues, profits, capital expenditures, hiring, employee compensation, prices paid, prices received and inventories. There are also questions that pertain to the economy and outlook, as well as to credit availability and borrowing. For 10 of the questions, respondents are asked to report the change from the previous quarter; for the other 10 they are asked to state the likely direction of these same indicators six months ahead.
The responses to each question are reported as diffusion indexes. The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep the MMBI from becoming negative. A reading above 100 for the MMBI indicates that the middle market is generally expanding; below 100 indicates that it is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
About The U.S. Chamber of Commerce
The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. For more information, visit uschamber.com and FreeEnterprise.com, like us on Facebook and follow us on Twitter.
About RSM US LLP
RSM US LLP is the leading provider of audit, tax and consulting services focused on the middle market, with 9,000 people in 90 offices nationwide. It is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 41,000 people in over 120 countries. RSM uses its deep understanding of the needs and aspirations of clients to help them succeed. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.