While the top-line seasonally adjusted reading stands well above the 110 that we think is the dividing line between expansion and contraction, the survey’s individual components point to potentially large declines in new orders and an aversion to risk not seen in the MMBI since the pandemic took hold in 2020.

Subindexes on gross revenues, net earnings and capital expenditures were all at or just above 110, and the reading on the general economy fell below that line, suggesting that middle market firms will barely avoid a recession through midyear.

It is quite possible that as capital expenditures ease, the economy and the middle market will grind down to a growth rate below 1% until a modicum of clarity on trade policy is established.

Less than half, or 43%, of the executives surveyed said they had increased, or planned to increase, capital expenditures, a notable decline from the 69% who said they planned to increase such expenditures in the first quarter.  The decline is a vivid illustration of the executives’ changed outlook on the economy.

Similarly, the Federal Reserve in its May meeting, citing the probability of rising prices and higher unemployment, indicated that the economy has about an equal chance of falling into recession or experiencing the weak growth it had forecast in March.

But the major takeaway in the MMBI survey was that executives reported declines across a range of categories, with 20% reporting lower capital expenditures, 24% citing reduced gross revenues and 26% reporting lower net earnings. All of these figures help explain the sharp drop in both the top-line index and the executives’ view of economic conditions.

It was little surprise, then, that only 44% of middle market firms said they had increased hiring compared to last quarter—a decline from 50% in the first quarter—and 45% said they supported recruitment with higher compensation, a drop from 57%.

In the current quarter, 35% of the survey participants said the economy had improved, while 44% said it had worsened somewhat or substantially. 

Moreover, less than half of the executives reported improvement in the economy, gross revenues and net earnings, all of which indicates a pullback in overall economic activity until a new pricing framework is established around imported goods.

Notably, 45% of all imports to the United States are intermediate goods that are then used in the domestic production of final goods.

With the effective tariff rate currently sitting at 17.8%, or 7.7 times higher than it was before the 2025 tariffs were imposed, it will take some time for middle market firms to adjust to wherever the final effective tariff rate lands and the associated higher costs.

Not surprisingly, in the subindex that tracks inflation—prices paid—77% of respondents reported an increase during the second quarter. We anticipate that this critical index will remain elevated or even increase to all-time highs since the MMBI survey began 10 years ago.

Unlike large multinational businesses, small and medium-sized enterprises simply do not have the financial depth to absorb the increase in costs.

Smaller firms, as a result, are passing along their higher costs downstream, as reflected in the 57% of executives who said they had raised prices in the current quarter and the 63% who intend to do so over the next six months.

However one measures the effects, the new trade policy will result in an increased cost of doing business and higher inflation. We will be closely monitoring the number of executives who report an increase in borrowing, which in the current quarter declined to 28% from 40% previously.

Inventory levels will be another area of focus. Larger firms with capital depth pulled forward new orders in the second quarter to avoid the substantial increase in trade taxes. Roughly 43% of survey participants increased their inventories, and only 42% indicated they will do so over the next six months, reflecting the general uncertainty about the cost of doing business going forward.

Given the sharp decline in inbound goods from Asia into the ports of Los Angeles and Long Beach, which handle 31% of all domestic trade, businesses and consumers will likely see a decline in available goods for back-to-school shopping and the holiday season.