RSM US Middle Market Business Index
MMBI reverses Q1 decline amid robust revenue and earnings expectations
INSIGHT ARTICLE |
Middle market business sentiment staged an impressive recovery in the second quarter, as the proprietary RSM US Middle Market Business Index rose to 132.3 from 124.1 in the prior period. The positive outlook was bolstered by robust revenue and earnings results at executives’ companies, and expectations that those trends will continue. Fifty-nine percent of businesses noted improvement in gross revenues, while 69 percent expect improvement in the second half. Views on net earnings were similar, with 55 percent of companies noting improvement in the current quarter, and 65 percent expecting it over the next six months.
The economy’s modest upturn and the strong rebound in equity prices before the survey likely underscored executives’ expectations about the path of future business activity in the second half of 2019. While that set of expectations augurs well for middle market growth this year, it was countered by responses to the remainder of the survey, which showed businesses are in the process of adjusting to a deceleration in growth as the economy comes down from the high that followed 2018’s federal tax cut.
Middle market firms retain significant reservations about making substantial investment in the software, equipment and intellectual property necessary to keep up with the integration of technology into the production of goods and the provision of services in an increasingly competitive economy. In our estimation, this reticence presents the major risk to the real economy in the near- to medium-term.
Stagnant on labor
Our special questions portion of the second-quarter survey, which focused on labor issues, denotes a reluctance to engage in aggressive hiring, in part due to the reduced supply of willing and available workers. Growth in the labor supply entering the market has declined to roughly one-half of 1 percent per year, in contrast with the average of 1 percent per year between 1945 and 2005. Thus, we are not surprised that 79 percent of middle market businesses answering a special question about the pool of qualified labor noted the shortage is a real problem.
While this paucity is partly due to a notable demographic transition as baby boomers age out of the workforce, the problem also likely reflects a reluctance by midsize companies to hire new workers at higher wages in a competitive market, when those workers may be poached after a short time by competing firms.
The RSM US Middle Market Business Index increased to 132.3, up significantly from 124.1 in the first quarter.
Gross revenue performance
Fifty-nine percent of executives reported gross revenues increased in the current quarter, a significant increase over last quarter (43 percent). Sixty-nine percent expect revenues to increase in the next six months.
Net earnings performance
Fifty-five percent of middle market executives reported net earnings increased in the current quarter, a significant increase over last quarter (47 percent).
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RSM US LLP and The Harris Poll have collected data on middle market firms from quarterly surveys that 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, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market.
The data for each quarter are weighted to ensure that they correspond to the U.S. Census Bureau data on the basis of industry representation. 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. Read more about how the index is constructed.