The data is based on responses from 404 senior executives at middle market firms in a survey conducted by The Harris Poll from July 8 to July 26, 2024.
Key takeaways
Economic and business conditions in the American real economy remain solid, according to the Q3 RSM US MMBI.
Over half of respondents expect the economy to improve during the final three months of 2024 and into the first quarter of 2025.
Forty-five percent saw improvement in current-quarter revenues; 65% said they expect further gains in the next six months.
The Middle Market Business Index is created in partnership with the U.S. Chamber of Commerce.
A strong U.S. economy in the first half of the year spilled over into the third quarter, as reflected in the RSM US Middle Market Business Index. The MMBI now stands at 130, representing a 2.3-point decrease from the reading of 132.3 in the prior quarter, a change that is not statistically significant.
Economic and business conditions in the American real economy remain solid as firms continue to register displeasure with the permanent increase in price levels, even as large majorities of survey participants express confidence that the economy, revenues and earnings will improve over the next six months.
Data through midyear indicates that the U.S. economy expanded at a 3.1% year-over-year pace. Our proxy for the health of the American real economy—real final private demand from domestic purchasers, excluding volatile trade, inventory accumulation and government consumption—increased at a rock-solid 2.9%, activity that clearly generated sufficient momentum to support elevated levels of business confidence.
That business confidence in turn has generated stout increases in forward-looking capital expenditures, providing businesses with the capabilities to meet demand, even as the pace of hiring has slowed.
While clear displeasure with the permanent upward shift in price levels presents an ongoing source of tension for the middle market firms that generate roughly 40% of U.S. gross domestic product, the ability to meet demand while slowing the pace of hiring should result in improved revenues and earnings. This is illustrated in the optimistic forward look in the third-quarter survey.
As the Federal Reserve embarks on its long-awaited policy pivot toward lower interest rates, we will keenly monitor the release of pent-up demand among firms looking to purchase a greater quantity of equipment, software and intellectual property. These capital outlays underscore the integration of sophisticated technology into the production of goods and provision of services inside the beating heart of the American real economy.
The data
A full 57% of survey participants expect the economy to improve during the final three months of 2024 and into the first quarter of 2025, in contrast with the 38% who stated the economy improved during the current quarter and the 34% who said it remained unchanged.
As the economy moves further away from the current price shock and past the upcoming presidential election, we suspect that topline views of it will improve.
So it was of little surprise that 65% of respondents noted an increase in prices paid in the current quarter, and 67% said they expect to pay more going forward. Similarly, 49% said they had passed along some of those price increases downstream, while 63% registered that they will do so over the next six months.
However, much like what occurred following the period of elevated inflation from 1965−1985, both households and businesses will continue to express displeasure about prices paid and prices received well past the point at which price stability has been restored to the U.S. economy; this is why business executives must improve their capacity to differentiate between noise and signal in business sentiment and condition surveys.
An inability to do so will result in lost opportunities as well as potential revenues and net earnings left on the table.
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One of the primary reasons middle market firms continue to experience strong growth is that revenues continue to improve. Forty-five percent of survey participants saw improvement in current-quarter revenues, and 65% said they expect further gains during the next six months. In addition, 40% of respondents said net earnings increased during the third quarter, while 64% said they expect net earnings growth going forward.
Sustained improvement in revenues and earnings supports continued investment in capital expenditures, as evidenced by the 44% of MMBI respondents who said they increased capital outlays and 55% who said they intend to do so over the next six months.
Rates along the belly of the U.S. Treasury curve—from two to five years—as well as along the long end of 10 years and beyond, will decline as the Federal Reserve embarks on its rate-cutting campaign in the fall. We are confident this will result in the release of pent-up demand for goods and services that had been deferred during the long period in which nominal rates reached multidecade highs and real rates continued to increase.
Perhaps one of the more interesting aspects of the third-quarter survey is the notable slowing in hiring. Only 36% of survey respondents stated they increased their hiring pace in the quarter. While 54% said they expect to hire more individuals going forward, we estimate this increase may not materialize, as firms have continued to hoard labor at higher costs and are now likely reaping the rewards of a three-year period of fixed business investment in technology that is bolstering productivity. Thus, middle market firms may simply not need to boost labor levels as capital investments bear fruit, leading to a slower pace of hiring.
American businesses are bullish on the economy and the future. Now, we need our elected officials to match that optimism with policies that will support and accelerate economic growth. Through the November elections and beyond, the U.S. Chamber is outlining policies that would ensure at least 3% annual real economic growth over the next decade.
Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce
Moreover, we were not surprised that 46% of survey participants indicated they increased compensation to attract labor and 62% said they will do so going forward.
As past investment in capital expenditures bears yields results, it should result in slower wage growth and profit margin expansion.
The takeaway
Despite lots of noise around a potential end to the current business cycle as growth, hiring and inflation cool, the third-quarter survey of middle market firms implies a sustained period of solid growth within what appears to be a quickly evolving and dynamic portion of the American economy.
We are optimistic that as interest rates and financial costs ease in the near term, we will see the release of pent-up demand in business investment and improved revenues and net earnings.
Firm executives that remain stuck in the doom-and-gloom crew are likely to miss a golden opportunity to expand revenues, net earnings and the prospects of their firms.
RSM contributors
General economy
Gross revenues
Net earnings performance
Capital expenditures
Overall hiring
Employee compensation
Access to credit
Planned borrowing
Amount paid for goods
Amount received for goods
Inventory levels
To refer to the percentages in the subindex items, access the PDF.
Adapting to digital technologies for efficiency and growth.
Retail trade executive
Protecting sensitive financial information from cyberthreats, data breaches and fraud.
Finance executive
Maintaining cost control in spite of shifting material prices to stay inside budget.
Construction executive
Keeping operations costs under control, and performance and quality strong.
Health care executive
Keeping pricing competitive even when the market shifts
Wholesale trade executive
Ensuring efficient use of water resources, addressing drought conditions and managing irrigation systems.
Educational services executive
SWIPE TO VIEW
The Real Economy Livestream series
Key economic themes affecting the middle market
Join RSM US Chief Economist Joe Brusuelas and U.S. Chamber of Commerce Executive Vice President Neil Bradley as they discuss the economic outlook and what middle market companies should anticipate.
Recorded September 18, 2024
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ABOUT THE RSM US MIDDLE MARKET BUSINESS INDEX
In partnership with the U.S. Chamber of Commerce, we've collected data on middle market firms since 2015 through quarterly surveys conducted by The Harris Poll.
The RSM US Middle Market Business Index provides a leading measure on the performance of businesses that make up the heart and soul of our country's economy.
Middle market organizations, which make up the real economy, are too big to be small and too small to be big. They are the backbone of the broader economy, yet they often fly under the public radar. They have distinct challenges and opportunities around financing, material resources, labor, technology, innovation, regulation and other issues. The MMBI breaks new ground by capturing the distinct sentiment of this important subset of the U.S. economy.
RSM US LLP and The Harris Poll have collected data on middle market firms from a quarterly survey 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 Middle Market Leadership Council, our survey panel, consists of approximately 1,600 middle market executives, and is designed to accurately reflect conditions in the middle market. The data is weighted to ensure that it corresponds to U.S. Census Bureau data on the basis of industry representation.
An index reading above 100 indicates that the middle market is generally expanding; a reading below 100 shows that the middle market is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
The MMBI survey is conducted four times a year. It is based on a subset of questions that ask middle market executives to report the change in a variety of indicators ranging from their organizations’ earnings to hiring levels and prices paid for goods and services.
The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep results from becoming negative. The index is designed to capture views on both current and future conditions; it includes five questions on middle market executives' recent experiences and five on their expectations for the future.
The survey panel, the MMBI Leadership Council, consists of approximately 1,600 middle market executives across a broad array of industries, and is designed to accurately reflect conditions in the middle market.
RSM US LLP and The Harris Poll have collected data on middle market organizations using quarterly surveys that began in the first quarter of 2015. The MMBI survey is typically conducted four times a year, in the first month of each calendar quarter: January, April, July and October.
- What are your expectations regarding the general economy?
- What are your expectations regarding your organization’s gross revenues?
- How would you describe the level of your organization’s most recent quarter net earnings results?
- What are your expectations regarding your organization’s aggregate capital expenditures or investments?
- What are your expectations regarding your organization’s overall hiring levels?
- How would you describe your organization’s current employee compensation level on average?
- How would you describe current access to credit?
- What are your expectations regarding your organization’s planned borrowing?
- How would you describe the current general level of prices received?
- What are your expectations regarding your organization’s planned inventory levels?
With a backlog of research for nearly 10 years, each question in the MMBI index is now seasonally adjusted using the Census X-13 method in order to remove periodic fluctuations associated with recurring calendar-related events. Seasonally adjusted values for questions make it easier to observe underlying fundamental changes, particularly those associated with economic expansions and contractions.
For this adjustment, the "increase" and "decrease" percentage components of each index question will be tested for seasonality separately and adjusted accordingly if such patterns exist. If no seasonality is detected, the component will be left unadjusted.
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