This report was fielded Oct. 3 to Oct. 21 , 2022, and based on the responses of 408 participants.
Key takeaways
The Middle Market Business Index declined in Q4.
Middle market firms should prepare for a pronounced slowdown in demand in the near term.
Businesses should continue to make critical investments in capital expenditures to bolster productivity.
Business conditions deteriorated in the final quarter of the year as the top-line MMBI eased to 124.2 from 136.7 the previous quarter.
While that reading remains at a level that signals expansion and reflects the resilience of the broader economy, two years of rising prices clearly have taken a toll on overall business conditions as well as expectations around revenues, net earnings and hiring.
On a seasonally adjusted index, the latest quarterly change is significant at both the 0.10 and 0.05 levels.
While the middle market index does not imply that the economy is in recession—we think a reading below 110 tends to indicate that—an array of economic indicators implies the American economy is decelerating into the end of the year. That slowdown underscores our estimation of a 65% probability of a recession over the next 12 months.
Persistent inflation that has spread into the service and housing sectors is leading the Federal Reserve to aggressively raise its policy rate. By the end of its increases, the Fed will almost certainly have raised its policy rate by more than 500 basis points over a 15-month period as it tries to restore price stability.
The U.S. economy does not descend slowly into recession. Rather, it tends to fall off a cliff. We think the lagging impact of rate hikes, which have already resulted in significant financial tightening, will become apparent in a sharp drop-off early next year, after the traditional holiday spending period ends.
In our estimation, middle market firms need to prepare for a pronounced slowdown in demand in the near term.
It is important that firms during this time continue to make critical investments in capital expenditures to bolster productivity during the imminent period when the economy is weak and inflation begins to ebb.
We recognize that increasing uncertainty around revenues and net earnings during downturns often discourages investment.
We asked middle market executives to describe a top business problem facing their organization. Here's what they had to say:
One of the main issues is finding bright and qualified employees.
Accommodations and food services executive
Balancing the remote working process for the organization.
Finance and insurance executive
The need to prioritize digital transformation initiatives, despite resistance to internal change and budgetary limitations.
Health care executive
Our biggest problem right now is the unpredictable condition of the market.
Transportation and warehousing executive
Company is facing recruitment problems to manage business productivity and growth.
Manufacturing executive
We need to update our employees’ benefits plan and cover all of their issues to deliver them a more flexible workspace.
Arts, entertainment and recreation executive
Accelerating digital transformation with the current IT budget, as well as managing inflation and supply chain security.
Finance and insurance executive
Investing in becoming cybersecure and adapting business operations to the world of digital first.
Educational services executive
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Still, the economy has not reached that point. Roughly 50% of respondents in the MMBI survey said they intended to increase capital expenditures over the next six months; that solid showing follows eight straight quarters in which a majority said they intended to do so. This data is encouraging and represents a much-needed reality check for all middle market firms.
The split between businesses’ expectations of a poor economy and their intention to keep investing follows the “second-hand pessimism” narrative that is developing. It holds that businesses feel badly about the economy, but they are continuing to hire, raise wages and invest as if the economy is in solid shape. This divergence between feelings and actions is helping keep the economy afloat because actions speak louder than words when it comes to growth.
Yet this outlook may not last. Businesses facing rising uncertainty will be tempted to pull back on critical investments in their firms and personnel.
That would be a significant suboptimal business decision and lead to reduced productivity and output.
Boosting innovation and technological capability during a downturn is a necessary component of business operations; to eschew those investments is simply a non-starter.
Beneath the headline
All 10 components of the RSM US Middle Market Business Index declined from the third quarter to the fourth, reflecting growing pessimism about the economy.
This shift in outlook is a function of the recent deterioration in business conditions. A sharp increase in respondents reporting a reduction in revenue and profit from the previous quarter should serve as a bellwether for firms to begin preparing for the end of the business cycle.
Persistent and elevated inflation has eroded consumer purchasing power and dampened business confidence. We can observe that erosion in the current outlook on the economy, hiring, revenues and net earnings.
The outlook for staffing soured in the fourth quarter as well. Just over half of respondents reported plans to increase hiring over the next six months, the lowest rate since mid-2020.
The share planning to reduce head count rose from 6.5% in the third quarter to 14.1% in the fourth, also the highest figure since 2020. The period of above-trend job growth driven by the recovery from the pandemic is drawing to a close.
Pricing pressures did not intensify in the fourth quarter, according to MMBI respondents. The 53% of respondents who raised prices from the third to fourth quarter is the lowest share since the first half of 2021, when surging and concentrated consumer demand quickly overwhelmed global supply chains. Respondents reported a similar easing when asked about prices paid for the inputs used in their operations.
Perhaps the biggest takeaway from the pricing data is that the ability to pass along price increases to consumers is beginning to ebb. Roughly 53% of respondents noted an increase in prices received, down from 69% in the third quarter.
Previously we noted that the ability to pass along price increases was most likely the primary catalyst behind the improvement in top-line sentiment during the third quarter. At the same time, executives told RSM that being able to pass along those higher prices was not sustainable and at one point would come to an end.
That end appears to be approaching.
Noteworthy findings
Nearly half (49%) of respondents said the economy had worsened in the fourth quarter, and 41% expected a continued downturn over the next six months.
The number of organizations boosting their hiring dropped sharply in the fourth quarter to 42% from 56% in the third quarter; 18% slowed their hiring, up seven points from the prior period.
Respondents for half of midsize companies said they would continue to boost capital outlays over the next six months, nearly on par with 52% in the prior quarter and following eight straight quarters with a majority doing so.
Temporary pandemic-era work patterns now appear to be the new normal
MMBI data shows
Middle market companies appear to be permanently adopting the remote and hybrid work practices that were driven by safety measures during the height of the COVID-19 pandemic, MMBI data shows.
Nearly three-quarters (74%) of executives polled said their companies had rolled out a hybrid work option, up nine points from the fourth quarter of 2021. Meanwhile, 33% of midsize firms had employees working remotely in the fourth quarter of this year who had not been doing so prior to the health crisis, down only three points from 36% a year earlier, according to responses to special questions in the survey.
More than half (54%) of businesses had made remote work a permanent option for some employees on a full- time basis, up from 48% a year earlier. Only one-quarter of respondents said their organizations were requiring remote workers to return to the office.
Culturally, the shifts in work patterns seemed to be having either a positive effect (39%) or no effect (38%) on the majority of businesses, while 24% said they’ve had a negative impact.
For full results of the special questions around workplace and hiring, please look for our MMBI special report, due out in the coming weeks.
RSM contributors
General economy
General economy performance
Nearly half (49%) of respondents said the economy had worsened in the fourth quarter, and 41% expected a continued downturn over the next six months.
Gross revenues
Gross revenues performance
Twenty-nine percent of companies saw revenue fall in Q4, significantly more than the 19% in Q3; 41% saw an increase.
Gross revenues performance: RSM US MMBI Q4 2022
Net earnings performance
Net earnings performance
For 33% of midsize companies, net earnings declined in the fourth quarter, significantly more than 24% in the prior period.
Net earnings performance: RSM US MMBI Q4 2022
Investments performance
Aggregate capital expenditures/investments performance
Respondents for half of midsize companies said they would continue to boost capital outlays over the next six months, nearly on par with 52% in the prior quarter and following eight straight quarters with a majority saying they planned to do so.
Aggregate capital expenditures: RSM US MMBI Q4 2022
Overall hiring
Overall hiring levels
The number of organizations boosting their hiring dropped sharply in Q4 to 42% from 56% in Q3; 18% slowed their hiring, up seven points from the prior period.
Overall hiring levels: RSM US MMBI Q4 2022
Employee compensation
Employee compensation
Significantly fewer (51%) of midsize companies gave raises in Q4, down from 65% in Q3. Those expecting to boost wages over the next six months fell to 60% from 71%.
Employee compensation: RSM US MMBI Q4 2022
Access to credit
Access to credit
One-fourth of executives said their organizations had a tougher time getting loans in Q4, down from 34% in Q3.
Access to credit: RSM US MMBI Q4 2022
Planned borrowing
Planned borrowing
Slightly fewer companies expect to borrow money over the next six months; 39% compared to 41% in the prior quarter.
Planned borrowing: RSM US MMBI Q4 2022
Amount paid for goods
Amount paid for goods and services
Goods and services remained more costly for an overwhelming majority of midsize firms. With 77% paying more in Q4, down from 82% in Q3.
Amount paid for goods and services: RSM US MMBI Q4 2022
Amount received for goods
Amount received for goods and services
Middle market companies had a harder time passing higher costs on to customers in Q4; 53% received more for goods and services, down sharply from 69% in Q3.
Amount received for goods and services: RSM US MMBI Q4 2022
Inventory levels
Inventory levels
Fewer (47%) midsize companies planned to stockpile inventory over the next six months in Q4, down from 54% in Q3 and roughly on par with those doing so currently.
Inventory levels: RSM US MMBI Q4 2022
- General economy
- Gross revenues
- Net earnings performance
- Investments performance
- Overall hiring
- Employee compensation
- Access to credit
- Planned borrowing
- Amount paid for goods
- Amount received for goods
- Inventory levels
General economy performance
Nearly half (49%) of respondents said the economy had worsened in the fourth quarter, and 41% expected a continued downturn over the next six months.
Gross revenues performance
Twenty-nine percent of companies saw revenue fall in Q4, significantly more than the 19% in Q3; 41% saw an increase.
Gross revenues performance: RSM US MMBI Q4 2022
Net earnings performance
For 33% of midsize companies, net earnings declined in the fourth quarter, significantly more than 24% in the prior period.
Net earnings performance: RSM US MMBI Q4 2022
Aggregate capital expenditures/investments performance
Respondents for half of midsize companies said they would continue to boost capital outlays over the next six months, nearly on par with 52% in the prior quarter and following eight straight quarters with a majority saying they planned to do so.
Aggregate capital expenditures: RSM US MMBI Q4 2022
Overall hiring levels
The number of organizations boosting their hiring dropped sharply in Q4 to 42% from 56% in Q3; 18% slowed their hiring, up seven points from the prior period.
Overall hiring levels: RSM US MMBI Q4 2022
Employee compensation
Significantly fewer (51%) of midsize companies gave raises in Q4, down from 65% in Q3. Those expecting to boost wages over the next six months fell to 60% from 71%.
Employee compensation: RSM US MMBI Q4 2022
Access to credit
One-fourth of executives said their organizations had a tougher time getting loans in Q4, down from 34% in Q3.
Access to credit: RSM US MMBI Q4 2022
Planned borrowing
Slightly fewer companies expect to borrow money over the next six months; 39% compared to 41% in the prior quarter.
Planned borrowing: RSM US MMBI Q4 2022
Amount paid for goods and services
Goods and services remained more costly for an overwhelming majority of midsize firms. With 77% paying more in Q4, down from 82% in Q3.
Amount paid for goods and services: RSM US MMBI Q4 2022
Amount received for goods and services
Middle market companies had a harder time passing higher costs on to customers in Q4; 53% received more for goods and services, down sharply from 69% in Q3.
Amount received for goods and services: RSM US MMBI Q4 2022
Inventory levels
Fewer (47%) midsize companies planned to stockpile inventory over the next six months in Q4, down from 54% in Q3 and roughly on par with those doing so currently.
Inventory levels: RSM US MMBI Q4 2022
More special reports based on our proprietary MMBI research
Middle Market Business Index
While the middle market index does not imply that the economy is in recession, an array of economic indicators implies the American economy is decelerating into the end of the year.
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Infrastructure special report | MMBI
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Workforce special report
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2022 supply chain report
RSM data shows how supply chain disruptions are affecting middle market companies.
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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.
The Real Economy
Monthly economic report
A monthly economic report for middle market business leaders.
Industry outlooks
Industry-specific quarterly insights for the middle market.
