Q4 2023 Middle Market Business Index

Booming real economy bolsters RSM US Middle Market Business Index

Dec 06, 2023

Key takeaways

The data is based on responses from 403 senior executives at middle market firms in a survey conducted by The Harris Poll from Oct. 2 to Oct. 20, 2023.

The MMBI increased to 132.9 in the fourth quarter, up from 129.6 in the previous period.

Middle market firms expect to continue making productivity-enhancing capital investments to bolster output.

Forty-six percent of survey participants boosted outlays on capital expenditures, and 66% intend to do so over the next half year.

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

U.S. Chamber of Commerce logo

Reflecting the strong expansion and rising productivity in the American economy, the RSM US Middle Market Business Index increased to 132.9 in the fourth quarter, up from 129.6 in the previous period. 

The index move, on top of 4.9% pace of growth in the third quarter, bolstered by a 4.7% increase in productivity, underscores the health of the U.S. middle market and an overall economy that we expect to grow at or above the long-term trend of 1.8% next year.

The major takeaway from the fourth-quarter survey, which asked senior executives of middle market businesses about their views on economic conditions, is that middle market firms expect to continue making productivity-enhancing capital investments to bolster output.

Those investments will create the conditions for improved revenues and net earnings—which strong majorities of middle market executives expect over the next six months, the survey found.

A plurality of the executives indicated that gross revenues and net earnings had improved during the current quarter, with 44% indicating better revenues and 41% noting improved earnings, in contrast with 32% and 37% indicating deterioration in those areas, respectively.

The executives’ outlook over the next six months was far more encouraging and constructive, with 72% anticipating strong revenues and 71% expecting improved net earnings.

From our vantage point, the sharp jump in productivity over the past six to 12 months implies a much better outlook for corporate margins, which is a function of revenues and net earnings improvement. 

We think this suggests improved corporate earnings ahead as pricing pressures ease and the past outlays on software, equipment and intellectual property boost overall economic activity at a reduced cost.

One hallmark of the pandemic era that has continued into the current expansion is the willingness of middle market firms to make investments to boost productivity during a time when labor remains tight. 

The Real Economy Livestream series

Middle market outlook: Gearing up for 2024

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 in the coming months.

It is encouraging that despite an increased cost of doing business, 46% of middle market firms boosted outlays on capital expenditures and 66% intend to so over the next half year. This stands in contrast with the 20% of executives who said they pulled back and 9% who intend to do so.

In the survey, 26% said they increased borrowing to finance commercial and industrial loans and 49% said that they would do so during the next six months. Those figures align with recent Federal Reserve data pulled from its Senior Loan Officer Opinion Survey, which pointed to an improvement in demand for commercial and industrial loans despite elevated borrowing costs.

The sour mood on the economy among the MMBI survey executives improved somewhat, with 42% indicating an improvement in general economic conditions, up from 36% previously, while 39% said there was some deterioration in overall economic conditions. Still, 62% of survey respondents indicated they anticipate an improvement in economic conditions through the middle of next year.

We have made the case for some time that when it comes to the economy, one should watch what households and firms do and not necessarily what they say. It is of little surprise that firms continue to invest in their operations, hire more people and lift overall compensation, as reflected in the current survey.

Approximately 44% of firms increased hiring during the quarter, and 66% intend to do so during the next 180 days. Roughly 52% of survey participants increased employee compensation, and 68% said they would do so in the near term.

During the first 10 months of the year, the economy added an average of 239,000 jobs per month (averaging 204,000 over the past three months), and compensation per hour worked has increased by 4.2% over the past year. While sentiment on the economy remains somewhat sour, it is simply not stopping middle market firms from expanding their operations.

Pricing is largely responsible for sour sentiment among the public and some firms. Middle market senior executives indicated that prices paid continue to increase, with 71% reporting they paid more for basic goods and 75% indicating they expect to continue paying more over the next six months. Nearly half, or 47%, of participants implied an increase in prices charged to firms downstream, and 66% said they would increase prices in the near term.

Middle market pricing power is one reason why firms remain optimistic about revenues and net earnings. American households continue spending amid strong employment, rising wages and high savings. This is likely why 47% of survey respondents indicated they had increased inventory accumulation in the fourth quarter and 63% implied they will do so to meet underlying demand in the near term.

While inflation peaked at 9.1% in June of last year and has eased to 3.7%, we expect a slow decline to 2.5% by the end of next year, which will almost certainly continue to drag down firm estimates of general business conditions.

In addition, we urge firms to prepare for a pricing environment that will not reflect the 20 years before the pandemic, when inflation increased between 1.5% and 2% a year. We anticipate a business framework where inflation will increase between 2.5% and 3% annually, with the risk of a faster pace of rising prices on a permanent basis. 

Looking ahead to 2024, it is encouraging to see that businesses in the middle market have improved their outlook on the economy. As businesses continue to invest in their growth, they need policymakers in D.C. to get serious about investing in them. That means tackling the rapidly rising regulatory burden and workforce challenges constraining further economic growth from the middle market sector.
Neil Bradley, senior vice president and chief policy officer at the U.S. Chamber of Commerce

Remote work is no longer an experiment, while hiring challenges remain, MMBI finds

The shift to remote and hybrid work, which began at the outset of the COVID-19 pandemic, has become a permanent fixture for some middle market companies three years later; meanwhile, retaining staff in a tight labor market marked by low unemployment presents ongoing challenges, RSM data shows.

Flexible work models in various forms at companies; 27% of executives surveyed in the fourth-quarter MMBI survey indicated they offer remote work options ranging from fully off-site to structured hybrid. Seventy-one percent said their firms require that all full-time work be done on-site have either no specific policy or offer an alternative. A greater share (33%) of smaller midsize firms—those with annual revenues of $10 million to $50 million—allow remote work, the MMBI survey found.

A majority of respondents whose firms have established flexible work models (60%) said the policies have had a positive impact on their organization’s culture, a change in sentiment from 39% a year ago. Twenty-four percent indicated the effect was neutral, and just 16% cited a negative impact. Reduced collaboration was seen as the biggest downside; 35% of companies with remote work arrangements said that factor had a major negative impact on the organization and another 36% said it contributed negatively in a minor way.

Meanwhile, while remote work policies are now established, executives' outlook about physical office space brings into question the longevity of those policies. Forty-six percent of respondents said their organizations are planning to increase their number of physical workspaces over the next two years, up from 25% a year ago. The percentage is even greater among executives at large firms ($50 million to $1 billion in annual revenues), up to 72% from 35% last year.

Hiring challenges

Citing factors that include a lack of qualified workers and competition with other employers, executives at middle market firms said they continue to foresee hiring challenges, but their concerns have moderated from a year ago. Sixty-six percent of executives surveyed indicated that filling open positions within their organizations over the next year will be challenging, down from 83% a year earlier. Over the same period, 64% of MMBI survey respondents anticipate that employee retention will present a separate challenge, easing from 77% in 2022.

Retention challenges are underscored by the MMBI data; 52% of middle market executives surveyed in the fourth quarter said they boosted wages, up sharply from 46% in the third quarter.

Please be on the lookout for the full MMBI special report on workforce, due out in January.

RSM contributors

From technology tools to human capital solutions, find out how you can implement strategies to optimize key processes and drive increased productivity. 

Slow growth in the UK middle market

"The economic condition in the UK remained tough at the end of the year, with the index suggesting slow growth in the middle market but not a recession. More positively, there are now clear signs of easing price pressures, both within the middle market and the broader economy. As a result, middle market firms are more optimistic about next year and, despite the higher interest rates, are investing in the future with productivity-enhancing technology."

Thomas Pugh, Economist, RSM UK Management Limited

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
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.

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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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