RSM US MMBI

Q3 2024 RSM US Middle Market Business Index

Middle market business conditions remain rock solid

September 12, 2024

Key takeaways

The data is based on responses from 404 senior executives at middle market firms in a survey conducted by The Harris Poll from July 8 to July 26, 2024.

Economic and business conditions in the American real economy remain solid, according to the Q3 RSM US MMBI.

Over half of respondents expect the economy to improve during the final three months of 2024 and into the first quarter of 2025.

Forty-five percent saw improvement in current-quarter revenues; 65% said they expect further gains in the next six months.

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

U.S. Chamber of Commerce logo

A strong U.S. economy in the first half of the year spilled over into the third quarter, as reflected in the RSM US Middle Market Business Index. The MMBI now stands at 130, representing a 2.3-point decrease from the reading of 132.3 in the prior quarter, a change that is not statistically significant.

Economic and business conditions in the American real economy remain solid as firms continue to register displeasure with the permanent increase in price levels, even as large majorities of survey participants express confidence that the economy, revenues and earnings will improve over the next six months.

Data through midyear indicates that the U.S. economy expanded at a 3.1% year-over-year pace. Our proxy for the health of the American real economy—real final private demand from domestic purchasers, excluding volatile trade, inventory accumulation and government consumption—increased at a rock-solid 2.9%, activity that clearly generated sufficient momentum to support elevated levels of business confidence.

That business confidence in turn has generated stout increases in forward-looking capital expenditures, providing businesses with the capabilities to meet demand, even as the pace of hiring has slowed.

While clear displeasure with the permanent upward shift in price levels presents an ongoing source of tension for the middle market firms that generate roughly 40% of U.S. gross domestic product, the ability to meet demand while slowing the pace of hiring should result in improved revenues and earnings. This is illustrated in the optimistic forward look in the third-quarter survey.

As the Federal Reserve embarks on its long-awaited policy pivot toward lower interest rates, we will keenly monitor the release of pent-up demand among firms looking to purchase a greater quantity of equipment, software and intellectual property. These capital outlays underscore the integration of sophisticated technology into the production of goods and provision of services inside the beating heart of the American real economy.

The data

A full 57% of survey participants expect the economy to improve during the final three months of 2024 and into the first quarter of 2025, in contrast with the 38% who stated the economy improved during the current quarter and the 34% who said it remained unchanged.

As the economy moves further away from the current price shock and past the upcoming presidential election, we suspect that topline views of it will improve.

So it was of little surprise that 65% of respondents noted an increase in prices paid in the current quarter, and 67% said they expect to pay more going forward. Similarly, 49% said they had passed along some of those price increases downstream, while 63% registered that they will do so over the next six months.

However, much like what occurred following the period of elevated inflation from 1965−1985, both households and businesses will continue to express displeasure about prices paid and prices received well past the point at which price stability has been restored to the U.S. economy; this is why business executives must improve their capacity to differentiate between noise and signal in business sentiment and condition surveys.

An inability to do so will result in lost opportunities as well as potential revenues and net earnings left on the table.

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One of the primary reasons middle market firms continue to experience strong growth is that revenues continue to improve. Forty-five percent of survey participants saw improvement in current-quarter revenues, and 65% said they expect further gains during the next six months. In addition, 40% of respondents said net earnings increased during the third quarter, while 64% said they expect net earnings growth going forward.

Sustained improvement in revenues and earnings supports continued investment in capital expenditures, as evidenced by the 44% of MMBI respondents who said they increased capital outlays and 55% who said they intend to do so over the next six months. 

Rates along the belly of the U.S. Treasury curve—from two to five years—as well as along the long end of 10 years and beyond, will decline as the Federal Reserve embarks on its rate-cutting campaign in the fall. We are confident this will result in the release of pent-up demand for goods and services that had been deferred during the long period in which nominal rates reached multidecade highs and real rates continued to increase.

Perhaps one of the more interesting aspects of the third-quarter survey is the notable slowing in hiring. Only 36% of survey respondents stated they increased their hiring pace in the quarter. While 54% said they expect to hire more individuals going forward, we estimate this increase may not materialize, as firms have continued to hoard labor at higher costs and are now likely reaping the rewards of a three-year period of fixed business investment in technology that is bolstering productivity. Thus, middle market firms may simply not need to boost labor levels as capital investments bear fruit, leading to a slower pace of hiring.

American businesses are bullish on the economy and the future. Now, we need our elected officials to match that optimism with policies that will support and accelerate economic growth. Through the November elections and beyond, the U.S. Chamber is outlining policies that would ensure at least 3% annual real economic growth over the next decade.
Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce

Moreover, we were not surprised that 46% of survey participants indicated they increased compensation to attract labor and 62% said they will do so going forward.

As past investment in capital expenditures bears yields results, it should result in slower wage growth and profit margin expansion.  

The takeaway

Despite lots of noise around a potential end to the current business cycle as growth, hiring and inflation cool, the third-quarter survey of middle market firms implies a sustained period of solid growth within what appears to be a quickly evolving and dynamic portion of the American economy.

We are optimistic that as interest rates and financial costs ease in the near term, we will see the release of pent-up demand in business investment and improved revenues and net earnings.

Firm executives that remain stuck in the doom-and-gloom crew are likely to miss a golden opportunity to expand revenues, net earnings and the prospects of their firms. 

RSM contributors

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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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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