RSM US MMBI

Q2 2023 Middle Market Business Index

America’s real economy shows resilience as RSM index eases to 131.3

Jun 06, 2023

Key takeaways

The data is based on responses from 404 senior executives at middle market firms in a survey conducted from April 3 to April 24.

Overall business conditions remained solid as the top-line sentiment indicator eased to 131.3 from 134.0 in Q2.

Fifty-two percent of respondents expect an improvement in the general economy in the second half of the year.

Businesses’ willingness to invest in productivity-enhancing capital expenditures represents a continuing sign of strength in the MMBI survey.

The Middle Market Business Index is created in partnership with the U.S. Chamber of Commerce.

U.S. Chamber of Commerce logo

Resilience, not recession, is the primary takeaway for the American economy from the most recent RSM US Middle Market Business survey.

Despite a variety of shocks to the real economy over the past two years, overall business conditions remained solid as the top-line sentiment indicator eased to 131.3 in the second quarter, down modestly from the 134.0 in the first quarter on a seasonally adjusted basis.

RSM US Middle Market Business Index

To put that in perspective, the 131.3 reading was in line with the 2017−2020 period before the pandemic, when the middle market generally thrived following steep federal tax cuts, a large increase in federal spending and low interest rates.

While executives expressed optimism about the economy over the next six months with respect to revenues, earnings and capital expenditures, their current views were tempered by lingering inflation, higher wage costs and the recent disruption among small and regional banks that play a vital role in lending to middle market firms.

We anticipate that the Federal Reserve’s aggressive interest rate increases will result in capital growing scarce just as credit is tightened in the wake of the recent banking disruption.

How much the real economy can absorb these shocks will almost surely be the difference between slow growth and a recession over the next year.

During the second quarter, evaluations of the economy soured a bit, with only 35% of survey participants indicating an improvement in the general economy, and 42% saying it had deteriorated.

It is important to note that this survey was put to field during a period of financial stress among small and midsize banks that serve many middle market companies. It is fair to state that some of the current evaluations of the general economy differ from the more optimistic views expressed in the survey.

Yet 52% of respondents expect an improvement in the general economy in the second half of the year, which we would attribute to sustained demand by U.S. households for goods and services.

There is approximately $500 billion in excess savings still in household accounts compared to pre-pandemic levels, according to a recent study by the San Francisco Federal Reserve, and that should support solid spending through the end of the year. As long as that spending prevails, middle market business conditions should remain solid.

On the pricing front, 79% of respondents said they had paid higher prices, which is up from 70% previously, while 79% expect to pay higher costs over the next six months.

For prices received, 57% of respondents indicated they had passed along higher prices to customers, with 70% expecting to do so in the second half of the year.

Expectations on revenues and net earnings remain strong amid a modest deterioration in the current quarter. We attribute this to a general compression in profit margins across the economy as lingering inflation continues to increase business costs and a rise in the cost  of capital affects firms’ bottom lines.

In the current quarter, 42% of respondents said that gross revenues improved, down from 53% in the first quarter, while 44% indicated an improvement in net earnings, which is down from 49%.

Survey answers imply that 70% expect improvement in gross revenues over the next six months and 65% assume that net earnings will improve over the next six months.

One continuing sign of strength in the MMBI survey has been firms’ willingness to invest in productivity-enhancing capital expenditures. Almost half, or 46%, said that they increased business investment and 60% expect to do so through the end of the year. 

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This is a bullish note within the current survey that we think bodes well for middle market firms, even if the economy falls into recession.

The most robust element of the American economy right now is the labor market. Labor demand and higher wages are bringing people off the sidelines and into the workforce.

Not surprisingly, hiring and hiring intentions remain stout, with 50% of respondents saying they increased hiring and 62% indicating they intend to do so over the next 180 days. Fifty-eight percent of survey participants said they increased compensation and 72% said they intend to do so in the near term.

Firms reduced their inventories as one would expect, and a strong majority are getting ready to expand inventory accumulation to get ready for the holiday shopping season. Borrowing conditions remained stable despite the disruption among local and regional banks. 

Middle market firms’ optimism about revenue and earnings, as well as increased capital expenditures, reflects an underlying confidence in business conditions looking ahead. Maintaining a healthy credit supply to service this optimism is vitally important to protecting economic growth as companies face continued interest rate, inflation and workforce challenges.
Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce

Midsize companies look for a way forward on digital transformation, MMBI finds

Middle market company executives understand that digital transformation is an important objective, but they are not always backing up their ambitions with action, according to data from the second-quarter MMBI survey.

Almost three-quarters (74%) of all respondents say digital transformation—the large-scale realignment of business operations to take advantage of technology—is either the most important area or among the most important areas of investment for their companies. But a majority (54%) of all respondents say they either are way off from achieving their digital transformation goals or believe it is not relevant to their businesses to even begin a digital transformation program. 

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And while artificial intelligence has been the subject of both bold predictions and dire warnings, that cultural buzz has not translated to major changes in the middle market. Just over a quarter (28%) of all respondents say they currently use AI in their businesses. This is less than the 34% of respondents who say they have not discussed using AI or have already decided against utilizing it. In addition, over half (56%) of all respondents have not used ChatGPT or other generative AI tools to support their business.

The survey results imply that in some areas of digital transformation, a gap exists between larger companies (annual revenues of $50 million to $1 billion) and smaller companies (annual revenues of $10 million to $50 million). For example, 56% of larger companies say they have substantially achieved their digital transformation goals, a percentage that is more than double the 27% of smaller companies who say the same thing. And two-thirds of bigger companies (66%) say they have a clear strategy that addresses their IT and digital transformation goals, noticeably more than the 41% of smaller companies who say they have a defined plan.

RSM contributors

On the middle market mind

We asked middle market executives to describe a top business problem facing their organization. Here's what they had to say:

General economy

General economy performance

Thirty-five percent of respondents said the economy had improved in the second quarter, down from 45% in the previous one.

 irty-five percent of respondents said the economy had improved in the second quarter, down from 45% in the previous one.
Gross revenues

Gross revenues performance

Forty-two percent of companies saw revenue increase in the second quarter, down 11 points from the prior quarter; however, 70% anticipate an increase in the next six months.

Forty-two percent of companies saw revenue increase in the second quarter, down 11 points from the prior quarter; however, 70% anticipate an increase in the next six months.
Net earnings performance

Net earnings performance

Forty-four percent of midsize companies saw net earnings increases, down slightly from 49% in the previous quarter.

Nearly half (49%) of midsize companies saw net earnings increases, up sharply from 39% from the previous quarter.
Investments performance

Aggregate capital expenditures/investments performance

Sixty percent of respondents said they would continue to boost capital outlays over the next six months; 46% did so in the second quarter.

Sixty percent of respondents said they would continue to boost capital outlays over the next six months; 46% did so in the second quarter..
Overall hiring

Overall hiring levels

Midsize organizations boosted payrolls in the second quarter, with 50% increasing hiring, up from 47% in the prior quarter.

Midsize organizations boosted payrolls in the second quarter, with 50% increasing hiring, up from 47% in the prior quarter.
Employee compensation

Employee compensation

Fifty-eight percent of midsize companies gave raises in the second quarter, holding steady with last quarter. ose expecting to boost wages over the next six months increased to 72% from 64%.

Fifty-eight percent of midsize companies gave raises in the second quarter, holding steady with last quarter.  ose expecting to boost wages over the next six months increased to 72% from 64%.
Access to credit

Access to credit

The ability to borrow dipped slightly in the second quarter, with 27% of respondents indicating an improvement in access to credit, down from 31% in the previous quarter.

 e ability to borrow dipped slightly in the second quarter, with 27% of respondents indicating an improvement in access to credit, down from 31% in the previous quarter.
Planned borrowing

Planned borrowing

Forty-three percent of companies expect to borrow money over the next six months, up slightly from 41% in the previous period.

Forty-three percent of companies expect to borrow money over the next six months, up slightly from 41% in the previous period.
Amount paid for goods

Amount paid for goods and services

Seventy-nine percent of middle market companies paid more for goods and services in Q2, up from 70% in Q1.

Seventy-nine percent of middle market companies paid more for goods and services in Q2, up from 70% in Q1.
Amount received for goods

Amount received for goods and services

More than half (57%) of midsize firms polled were able to charge more for goods and services in the second quarter, up slightly from 56% in the previous quarter.

More than half (57%) of midsize firms polled were able to charge more for goods and services in the second quarter, up slightly from 56% in the previous quarter.
Inventory levels

Inventory levels

Forty-eight percent of firms with inventories saw their supplies increase in the second quarter, down from 52% in the prior period.

Forty-eight percent of firms with inventories saw their supplies increase in the second quarter, down from 52% in the prior period.

General economy performance

Thirty-five percent of respondents said the economy had improved in the second quarter, down from 45% in the previous one.

 irty-five percent of respondents said the economy had improved in the second quarter, down from 45% in the previous one.

Gross revenues performance

Forty-two percent of companies saw revenue increase in the second quarter, down 11 points from the prior quarter; however, 70% anticipate an increase in the next six months.

Forty-two percent of companies saw revenue increase in the second quarter, down 11 points from the prior quarter; however, 70% anticipate an increase in the next six months.

Net earnings performance

Forty-four percent of midsize companies saw net earnings increases, down slightly from 49% in the previous quarter.

Nearly half (49%) of midsize companies saw net earnings increases, up sharply from 39% from the previous quarter.

Aggregate capital expenditures/investments performance

Sixty percent of respondents said they would continue to boost capital outlays over the next six months; 46% did so in the second quarter.

Sixty percent of respondents said they would continue to boost capital outlays over the next six months; 46% did so in the second quarter..

Overall hiring levels

Midsize organizations boosted payrolls in the second quarter, with 50% increasing hiring, up from 47% in the prior quarter.

Midsize organizations boosted payrolls in the second quarter, with 50% increasing hiring, up from 47% in the prior quarter.

Employee compensation

Fifty-eight percent of midsize companies gave raises in the second quarter, holding steady with last quarter. ose expecting to boost wages over the next six months increased to 72% from 64%.

Fifty-eight percent of midsize companies gave raises in the second quarter, holding steady with last quarter.  ose expecting to boost wages over the next six months increased to 72% from 64%.

Access to credit

The ability to borrow dipped slightly in the second quarter, with 27% of respondents indicating an improvement in access to credit, down from 31% in the previous quarter.

 e ability to borrow dipped slightly in the second quarter, with 27% of respondents indicating an improvement in access to credit, down from 31% in the previous quarter.

Planned borrowing

Forty-three percent of companies expect to borrow money over the next six months, up slightly from 41% in the previous period.

Forty-three percent of companies expect to borrow money over the next six months, up slightly from 41% in the previous period.

Amount paid for goods and services

Seventy-nine percent of middle market companies paid more for goods and services in Q2, up from 70% in Q1.

Seventy-nine percent of middle market companies paid more for goods and services in Q2, up from 70% in Q1.

Amount received for goods and services

More than half (57%) of midsize firms polled were able to charge more for goods and services in the second quarter, up slightly from 56% in the previous quarter.

More than half (57%) of midsize firms polled were able to charge more for goods and services in the second quarter, up slightly from 56% in the previous quarter.

Inventory levels

Forty-eight percent of firms with inventories saw their supplies increase in the second quarter, down from 52% in the prior period.

Forty-eight percent of firms with inventories saw their supplies increase in the second quarter, down from 52% in the prior period.

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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.

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