The survey was conducted from Jan. 9 to Jan. 30 and reflects the responses of 406 senior executives at middle market firms across industries.
Key takeaways
57% of middle market executives are expecting an increase in both gross revenues and net earnings through the middle of the year.
53% said they had bolstered their stock of goods, which, given the drawing down of excess savings by households, demands close monitoring.
Middle market business conditions remain solid heading into the middle of the year as firms continue to adapt, improvise and overcome challenges.
The Middle Market Business Index is created in partnership with the U.S. Chamber of Commerce.
A resilient American economic expansion is continuing in the middle market as firms navigate economic headwinds and crosscurrents, according to a recent survey of executives by RSM US LLP.
Easing inflation and solid household consumption underscored the 9.4-point increase in the RSM US Middle Market Business Index, which saw the top-line figure jump to 134.0 in the first quarter from 124.6 during the final three months of last year.
With a 9.4-point increase in topline sentiment, middle market firms have optimism about business conditions as we start the year. Increases reported in firms’ revenues and earnings for Q1 2023 and slowing inflation are driving optimism in the middle market sector. However, as household savings continue to fall, close attention will have to be paid to consumers’ ability to spend throughout the year and the impact of a potential decrease in household expenditures.
Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce
If one had asked a year ago whether the American real economy would be able to absorb the twin shocks of surging inflation and rising interest rates, the prevailing consensus would have almost certainly been no.
For now, though, that is not the case. The economy expanded at a 3% pace during the final six months of last year, and robust consumer activity in January indicates that the current economic expansion is not finished.
The ability of the middle market to withstand those hits reflects an underlying resilience of households and midsize organizations to adapt to the unique crosscurrents that characterize the post-pandemic economy.
The increase in the top-line index reflects not only that resilience but also relief. Overall inflation peaked last June, continues to moderate and is experiencing outright disinflation in the goods sector.
This has influenced the 53% of respondents who indicated an increase in gross revenues, up from 42% in the final quarter of last year, and the 49% of participants who reported an increase in net earnings.
More impressive is the forward look of the 57% of respondents who are expecting an increase in both gross revenues and net earnings through the middle of the year.
But that combination of resilience and relief has also bolstered business confidence to the point that firms are increasing inventories in the first quarter, posing a degree of risk going forward as the lagged impact of interest rate increases starts to sink in.
More than half, or 53%, of MMBI respondents said they had bolstered their stock of goods, which, given the drawing down of excess savings by households, demands close monitoring.
Have your inventories increased recently?
Are you concerned about a downturn leaving you with excess supplies?
Learn more about navigating this new supply chain landscape from the professionals at RSM US.
The recession question
The current pace of household consumption, with retail sales increasing by 3% in January, is likely unsustainable. An old-fashioned inventory overhang is one way to help put the economy into a recession.
We have previously made the case that we could see a mild recession instead of a slowdown if firms pull back on gross private investment.
That restraint was evident during the final three months of last year, when firms decreased fixed business investment by 6.7%, driven by a decline of 3.7% in outlays on equipment.
Residential investment dropped by 26.7% during the final quarter of 2022, and the housing sector is the one industrial ecosystem now in recession.
If the U.S. economy falls into a recession this year, it will most likely be an unsynchronized contraction, with housing, manufacturing and retail, as well as other areas of the service economy, experiencing it to different degrees.
But not all areas of the services sector will see similar adverse circumstances, so we maintain our baseline view on a mild recession this year.
The data
In the survey, sentiment on the overall economy surged, with 47% of executives indicating the economy had improved, up from only 28% previously, and 41% expecting it to improve over the next six months.
The combination of solid demand, an easing in prices paid and a mild increase in prices received is most likely behind a plurality of respondents indicating a general improvement in economic conditions.
Roughly 69% of respondents said that prices paid had increased, down from a recent peak of 82% in the third quarter of last year. Overall inflation peaked last June, and middle market firms have no doubt benefited from the correction in oil and gasoline prices. They have also been aided by disinflation in the goods sector, which is a big reason for the increase in top-line sentiment.
One note of caution: Service sector inflation has not yet peaked. It is up by 7.6% on a year-ago basis through January, mostly driven by housing and housing services. Both of those categories are part of a complex chain of factors driving rising wages.
Costs for core services excluding housing rose by 6.18% through the end of January. Both services costs and core services costs, excluding shelter, tend to be sticky, and will most likely not recede as quickly as goods prices as supply chain disruptions dissipate.
Demand at the start of the year was so strong that 55% of respondents indicated they benefited from an increase in prices received. Approximately 62% of respondents expect to pass along higher prices over the next six months.
Capital expenditures continue to impress, with 49% of respondents indicating that they had increased outlays on productivity-enhancing software, equipment and intellectual property in the quarter. A full 55% said they intended to do so through midyear.
Employment and compensation both continue to reflect a historically tight labor market that will most likely temper the robust gross revenues and earnings outlook.
Of firms surveyed, 47% increased hiring and 58% used higher compensation to attract labor. Looking ahead, 51% of respondents intend to hire more workers and 63% indicated they will increase compensation to compete for scarce labor.
The takeaway
Middle market business conditions remain solid heading into the middle of the year as firms continue to adapt, improvise and overcome substantial challenges posed by interest rate hikes and inflation.
RSM contributors
UK MMBI posts dramatic jump
"The U.K. economy has shown remarkable resilience in the face of a record-breaking fall in real incomes and the largest rise in interest rates in a generation. The middle market is no exception. Indeed, the RSM UK Middle Market Business Index rose to 131.4 in Q1, a jump of almost 16 points, the largest in the index’s relatively short history.
"However, there are two key risks ahead. First, despite the recent resilience, the U.K. economy is still likely to fall into recession in the first half of this year. Second, there was a large jump in the proportion of middle market firms accumulating stocks (inventories). This increase in stock levels is particularly concerning because demand, especially for goods, is likely to decrease over the next six months as the real economy falls into recession."
Thomas Pugh, Economist, RSM UK
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General economy
General economy performance
Forty-seven percent of respondents said the economy had improved in the first quarter, up from just 28% in the previous one.
Gross revenues
Gross revenues performance
Over half (53%) of companies saw revenue increase in the first quarter, up 11 points from the prior quarter; 57% anticipate an increase in the next six months.
Net earnings performance
Net earnings performance
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
Fifty-five percent of respondents said they would continue to boost capital outlays over the next six months and nearly half had done so in the first quarter.
Overall hiring
Overall hiring levels
Midsize organizations boosted payrolls in the first quarter, with 47% increasing hiring, up five points from Q4 2022.
Employee compensation
Employee compensation
More midsize companies (58%) gave raises in the first quarter, up from last quarter's 52%. Those expecting to boost wages over the next six months increased to 63% from 60%.
Access to credit
Access to credit
The ability to borrow rose sharply in the quarter, with 31% of respondents indicating an improvement in access to credit, up from 24% in 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.
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 received for goods
Amount received for goods and services
More than half (55%) of midsize firms polled were able to charge more for goods and services in the first quarter, up slightly from 53% in Q4.
Inventory levels
Inventory levels
Fifty-three percent of firms with inventories saw their stockpiles rise in the first quarter, up from 46% in the prior period.
- 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
Forty-seven percent of respondents said the economy had improved in the first quarter, up from just 28% in the previous one.
Gross revenues performance
Over half (53%) of companies saw revenue increase in the first quarter, up 11 points from the prior quarter; 57% anticipate an increase in the next six months.
Net earnings performance
Nearly half (49%) of midsize companies saw net earnings increases, up sharply from 39% from the previous quarter.
Aggregate capital expenditures/investments performance
Fifty-five percent of respondents said they would continue to boost capital outlays over the next six months and nearly half had done so in the first quarter.
Overall hiring levels
Midsize organizations boosted payrolls in the first quarter, with 47% increasing hiring, up five points from Q4 2022.
Employee compensation
More midsize companies (58%) gave raises in the first quarter, up from last quarter's 52%. Those expecting to boost wages over the next six months increased to 63% from 60%.
Access to credit
The ability to borrow rose sharply in the quarter, with 31% of respondents indicating an improvement in access to credit, up from 24% in Q4 2022.
Planned borrowing
Slightly fewer companies expect to borrow money over the next six months; 39% compared to 41% in the prior quarter.
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 received for goods and services
More than half (55%) of midsize firms polled were able to charge more for goods and services in the first quarter, up slightly from 53% in Q4.
Inventory levels
Fifty-three percent of firms with inventories saw their stockpiles rise in the first quarter, up from 46% 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.
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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