The Real Economy livestream recap

American middle market businesses show their resilience

Feb 13, 2023

Key takeaways

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Inflation is easing, though price of services remains elevated

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A labor shortage is a major challenge to easing inflation

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The stand-off over the debt ceiling remains a wild card in the economy

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Looking ahead, Congress needs to deal with tax and regulatory issues

Labor and workforce Economics Inflation

After recession warnings, businesses have persevered amid economic headwinds.

After months of warnings about a coming recession, American middle market businesses have proven to be resilient as the new year begins, said Joe Brusuelas, chief economist for RSM US LLP, and Neil Bradley, executive vice president and chief policy officer for the U.S. Chamber of Commerce.

While Brusuelas was careful to note that there still is a 65% likelihood of a recession later this year, easing inflation and improving supply chains have buoyed the prospects for American middle market businesses, he said in a wide-ranging conversation during a recent quarterly webcast sponsored by RSM US and the Chamber.

The American economy has been much more resilient than anyone could have imagined.
Joe Brusuelas, RSM Chief Economist

But real risks remain, he added. The economy has not yet felt the full impact of the Federal Reserve’s aggressive series of interest rate increases as it tries to restore price stability.

Bradley agreed that the economy has been resilient, and he pointed to sentiment surveys of individual consumers and small businesses that reflected a general confidence in their own economic situation. At the same time, though, those surveys showed a negative view of the economy overall.

Bradley called it second-hand pessimism. 

“People are really pessimistic, but it’s not based on their own experiences at the moment; it’s their perception of what’s happening elsewhere,” he said.

All the while, middle market businesses are confronted with challenges like finding enough employees to fulfill strong demand from customers, Bradley said. 

Improving inflation outlook

One reason for an improved outlook, Brusuelas said, is the easing of inflation.

“We’ve now entered the post-pandemic phase, where the shocks are beginning to wear off, specifically the disruption of the supply chains,” he said. “We’re probably near the bottom of this.”

He cited disinflation in the price of goods, which declined through December by 4.8%.

But Brusuelas also noted that the economy was far from being out of the woods when it comes to inflation. Services inflation remains stubbornly high, both Brusuelas and Bradley said.

And some inflation will re-accelerate over the coming months on a monthly basis, though the comparisons to a year ago will continue to be more favorable.

“As the base effects of the war in Ukraine wear off, so will some of the sour sentiments,” he said.

Labor shortage

Perhaps no issue represents a greater challenge to bringing down inflation—and to improving productivity among middle market businesses—than the persistent shortage of workers in the American economy.

Brusuelas and Bradley noted how the American labor force has not grown in recent years in a way that keeps up with job creation. Since the pandemic began, there is a gap of 700,000 to 1 million workers who would otherwise be contributing to the economy.

“Those workers are not going to be there,” Bradley said. He also cited workers quitting during the pandemic, known as the Great Resignation.

The answer, he said, is to adopt policies that encourage work and expand the labor pool.

“We need an all-of-the-above approach,” he said, and cited a three-pronged strategy:

  • Pull back workers who recently retired: People in this segment have good working years left and need to be persuaded to rejoin the labor force. The labor force participation rate remains below pre-pandemic levels.
  • Support working women: The increased demands on families during the pandemic prompted many women to leave the labor force. Improved child care, and policies that support it, could help. What’s more, Brusuelas said, “child care is a great retention tool for larger employers.”
  • Improve immigration policies: Demographic shifts in the American economy require Congress to pass legislation that expands the use of H-1B visas and increases the number of workers who can fill needs that currently go unmet.


Debt ceiling stand-off

A wild card in the American economy is the stand-off over raising the nation’s debt ceiling.

Already, Brusuelas said, middle market businesses are paying a price for the stand-off in the form of higher credit costs.

But that price could soar even further if the government goes into default, a scenario that Treasury Secretary Janet Yellen has said would be a catastrophe for the economy.

Bradley expressed optimism that a deal would be reached, though it may come after a lot of brinksmanship by both sides of the political aisle.

“Reasonable people have to let cooler heads prevail,” he said.

Looking ahead

Bradley was careful to note that challenges remain in the American economy, even as businesses show resilience. He mentioned two broad areas that merit attention—taxes and regulatory policies—from lawmakers and policymakers.

For taxes, many provisions of the Tax Cuts and Jobs Act of 2017 are starting to expire, which will require Congress to address some of the more effective aspects of that legislation, like depreciation rules.

And for regulatory policy, Bradley said that some of the current policy proposals from the Federal Trade Commission took a more aggressive approach to, for example, regulating pricing, than had been seen in decades.

“This is a debate we have not seen since the early 1970s,” which, coincidentally or not, was a period of soaring inflation.

Watch the recording for the full discussion:

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