RSM Middle Market Business Index: August 2020

An easing of the pandemic in August and a late-summer stabilization in overall economic activity were the primary catalysts behind the sharp increase in the RSM US Middle Market Business Index to 124.7 from 101. 

The August reading of the proprietary index, which is a broad measure of middle market economic sentiment, implies that the middle market has entered an initial phase of recovery that denotes better growth, and improved revenue and earnings prospects. 

The survey respondents’ focus on improvement over the next six months is likely linked to the modest pace of business reopenings around the economy and hopes that a workable vaccine will be produced and distributed in early 2021. 

That being said, there is reason for caution. With new infections in the United States remaining elevated at 11.7 per 100,000 through Sept. 7, according to Opportunity Insights of Harvard University, middle market business sentiment will likely be influenced in the coming months by the ebb and flow of the pandemic ahead of what is going to be a critical winter period for public health. 

Still, many of the executives surveyed remained optimistic looking out six months, even as they expressed a more tempered sentiment in the near term. 

While 47% of respondents noted that the economy improved in August, a robust 66% expected that to be the case six months from now. This appears to reflect the unfortunate reality of an economy that is currently using roughly 80% of its capacity to produce and consume goods and services. Yes, things are getting better, but it is a slow grind amid a real economy that remains impaired.

The forward look on earnings and gross revenues reflected a similar duality. Approximately 60% of the survey’s participants expect a much better gross revenues environment, while 64% noted that they anticipate an improved earnings picture. In addition, 43% said that gross revenues had improved during August, and 46% said that earnings did. 

The one area of the survey that does denote risks for small and medium-size firms over the medium term is the caution on capital expenditures. Only 38% of participants noted an increase in capital expenditures in August, and 47% stated an expectation to do so over the next 180 days. This is neither consistent nor commensurate with the more robust earnings and revenues expectations. 

Given the likely damage to small firms wrought by the pandemic, this strongly implies that policy attention will need to be given to the supply side of the economy to stimulate hiring and productivity gains in the coming years to return to the economic levels before the pandemic. 

The current outlook on hiring reflects the restrained level of output in the current quarter, with 46% of participants saying that hiring improved during the month and 54% expecting it would do so by the middle of the first quarter in 2021. Accordingly, 39% said that compensation increased and 53% said they expected it would do so by early next year. 

Expectations on borrowing six months ahead remained essentially unchanged, with 40% saying that it would improve; 31% said their access to credit improved in August, up from 19% in July. 

It is clear that pricing conditions improved along with the nascent rebound in economic activity, with 59% of respondents noting that they faced rising prices and 64% expecting to do so. Given the general decline in price levels following the onset of the pandemic in early 2020, this is to be expected and inflation is not a risk to the economic outlook in the near to medium term. Roughly 41% of respondents noted they observed an improvement in prices received, and 53% expected that to be sustained over the next six months. 

Finally, as one would expect because of the economic rebound following the 31.7% decline in gross domestic product during the second quarter of the year, actual and expected inventory levels improved.