The data is based on responses from 416 senior executives at middle market firms in a Harris Poll survey conducted from July 5 to July 25, 2023.
Key takeaways
The MMBI inched down to 129.3 in the current quarter from 131.1 in the prior period.
Seventy percent of those surveyed expect revenue to rise over the next six months.
Recession probability appears to be ebbing as organizations adjust to higher pricing levels.
The Middle Market Business Index is created in partnership with the U.S. Chamber of Commerce.
The U.S. economy looks to be expanding in line with its long-term trend of 1.8% in the third quarter amid stabilizing prices, solid demand and a robust jobs market that presents a challenge to firms looking to grow. The RSM US Middle Market Business Index remained essentially unchanged, inching down to 129.3 in the current quarter from 131.1 in the prior period.
One of the hallmarks of economic expansion over the past two years has been a divergence between current and future views of the economy. While the mid-market evaluation of the current economy remains dour—only 35% of respondents in the MMBI indicated that the economy improved in the current quarter—the view of the next six months is robust, with close to 60% expecting improvement.
Sifting through data on business sentiment across the real economy, we get the sense that the final adjustment to the inflation shock is now occurring, as overall growth in pricing has slowed to tolerable levels. Organizations’ evaluation of the current economy is still tempered by the permanent increase in prices of most goods and services. However, the forward look on the economy, revenues, earnings and even pricing remains rock solid, indicating the probability of a soft landing for the U.S. economy is rising following the twin shocks of inflation and higher interest rates.
Perhaps the strongest sign of support for this conjecture is the MMBI data on revenues and gross earnings. A solid 70% of survey respondents expect revenue to rise over the next six months, while 68% anticipate an improvement in net earnings over the same period. Based on this confident forward look, 63% of respondents expect to increase outlays on productivity-enhancing capital expenditures, consistent with a soft landing in the U.S. economy.
In contrast, during the current quarter, only 42% of respondents stated improvement in gross revenues, while just 40% saw a rise in net earnings. Just 42% said they increased capital spending.
Moreover, risks of an inventory correction appear to have abated; 39% of respondents increased inventories in the current quarter and 56% said they plan to boost them during the next two quarters. Should these trends hold, they will provide more evidence that the American economy will muddle though and avoid a recession.
Livestream event
Financial conditions and the cost of doing business inside the real economy
Join RSM Chief Economist Joe Brusuelas and U.S. Chamber of Commerce Executive Vice President Neil Bradley as they discuss economic factors that point to a soft landing, including growth, materials pricing, labor outlook and other issues affecting middle market businesses.
Monday, Sept. 25, 2023 | 1:00 p.m. EDT
Recession probability is ebbing
Looking below the solid top-line business sentiment index and the sour evaluation of the current economy, the probability of a recession does appear to be ebbing as organizations adjust to higher pricing levels and get on with doing business.
The torrid pace of hiring that characterized the economy over the past two years is now gradually cooling in an orderly fashion, and MMBI data showed that this is true for midsize organizations. Roughly 38% of respondents indicated they increased hiring during the current quarter—down from 49% in the prior period. Sixty percent stated they intend to add workers in coming months. Forty-five percent said they boosted wages to attract labor and 68% expect to do so over the next half year.
We continue to note that the primary challenge to expansion for small and middle-sized firms is almost certainly finding able and willing employees to meet demand. Currently there are approximately 9.6 million jobs openings in the U.S., and only 5.2 million individuals actively looking for work. With 4 million people working part time for economic reasons, competition for labor is expected to remain intense, and companies will have to offer better compensation, benefits and workplace flexibility to attract that labor.
Middle market businesses are bullish about the future for their companies and the economy. They are planning to put money behind that optimism, adding new employees and expanding their infrastructure. However, a tight labor market and credit restrictions could dampen those plans. Policymakers can help by expanding the workforce and by ensuring that new regulations don’t limit access to credit.
Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce
Those labor costs that traditionally account for roughly 70% of all business costs are clearly being passed downstream in the form of higher prices. This was underscored by 70% of respondents who indicated they paid more for all goods and services in the current quarter, and 74% expect to do so in the near term.
However, the economy has clearly reached a point where firms are in the final phase of passing along those costs. Only 44% of MMBI survey participants indicated they raised prices in the current quarter, and 64% indicated they anticipate doing so over the next six months, down from 70% during the second quarter of this year and the cyclical peak of 77% in the third quarter of 2022.
UK MMBI posts dramatic jump
"The UK economy will resemble a seesaw over the next year. On one end will be the recovery in households’ real incomes, driven by falling inflation and a robust labour market. On the other side will be the impact of the huge surge in interest rates that have happened over the last year and a half. Over the rest of this year, the positive side is likely to win, meaning economic growth should improve in Q3 and Q4 after a moribund first half. But as we get into 2024, the negative impact of higher interest rates is likely to grow heavier. While we think the UK will avoid a recession, we’re expecting virtually no economic growth next year, meaning it wouldn’t take much to tip the balance of the economic seesaw into the favour of a recession"
Thomas Pugh, Economist, RSM UK Management Limited
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.
RSM contributors
One of the biggest problems is the lack of employees with talent and experience. But we are working to solve it by attracting talent from several regions.
Retail trade executive
It can be challenging to stay on top of new laws and assure adherence to existing ones, but doing so is crucial if we want to delight customers and foster loyalty.
Finance executive
The cost of construction materials and labor, and also the prices of raw materials, such as steel, lumber and concrete, have been on the rise, which directly impacts project budgets.
Construction executive
Attracting skilled employees with the right expertise has become difficult, and we need to focus on creating a positive work culture for better results.
Finance executive
Not being able to keep up with emerging technology such as AI, automation, blockchain; that has become a challenge for us.
Education executive
The biggest business issues include medical and social support agencies must be ready for the needs of patients with a variety of illnesses and disabilities as the population ages and diversifies.
Health care executive
SWIPE TO VIEW
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
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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 have distinct challenges and opportunities around resources, labor, technology, innovation, regulation and more.
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 survey panel, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market. The data is weighted to ensure that they correspond to the U.S. Census Bureau data on the basis of industry representation.
A reading above 100 for the MMBI indicates that the middle market is generally expanding; below 100 indicates that it is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
The survey is conducted four times a year. The survey panel, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market.
The data for each quarter are weighted to ensure that they correspond to the U.S. Census Bureau data on the basis of industry representation.
The MMBI is borne out of the subset of questions in the survey that ask middle market executives to report the change in a variety of indicators.
The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep the MMBI from becoming negative. The index is designed to capture both current and future conditions, with five questions on middle market executives' recent experience and five on their expectations for future activity.
The survey panel, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market.
The data for each quarter are weighted to ensure that they correspond to the U.S. Census Bureau data on the basis of industry representation.
RSM US LLP and The Harris Poll have collected data on middle market firms from quarterly surveys 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 survey panel, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market.
- 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?
Now that enough observations exist, each question in the index will be 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 will 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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