Middle Market Outlook Remains Strong Amid Concerns About Inflation, Labor Market

The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, remains strong, posting  the sixth highest result in the past four years, down slightly from the third quarter of 2018. Executives remain positive about economic growth as they look to 2019 but are cognizant of rising inflationary pressures, a historically tight labor market, and an uncertain outlook for tariffs and trade policy.

In the fourth quarter of 2018, the MMBI posted a composite score of 132.0, a slight 2.4-point decrease from last quarter’s 134.4. Business leaders anticipate a strong start to 2019, with 64 percent of survey respondents anticipating gross revenues to increase somewhat or substantially in the next six months and 61 percent expecting net earnings to increase over the same time period. However, they are beginning to feel inflationary pressures. Of leaders surveyed, 68 percent indicated their businesses experienced pricing pressures above and beyond rising compensation costs in the fourth quarter versus  the third quarter, and 71 percent anticipate prices paid to increase somewhat or substantially during the next six months.

“This quarter’s MMBI performance conforms to our forecast for a moderating economy as we head into 2019, but business activity – particularly in the middle market – remains strong, and a recession is far from imminent,” said Joe Brusuelas, RSM US LLP chief economist. “Even so, clouds are forming on the horizon related to declining fiscal outlays later in 2019, inflationary pressures and, perhaps most importantly, an uncertain outlook for tariffs and trade policy.”

Navigating Rising Inflationary Pressures and the Historically Tight Labor Market
Low unemployment – which has hovered at or below 4 percent since April 2018 – prevails as a top concern for middle market businesses and is forcing higher wages amid a tightening pool of qualified workers. Eight percent of executives report that hiring levels decreased in the quarter, a cyclical low consistent with other labor market data, including initial jobless claims (which are at a 50-year low) and the low number of available workers per job opening. Nearly half of executives surveyed (48 percent) indicate that they increased compensation levels in the third quarter, while more than half (59 percent) expect to do so in the next six months.

“The recently imposed tariffs are negatively impacting businesses’ bottom lines and threatening economic growth,” said Neil Bradley, U.S. Chamber executive vice president and chief policy officer. “American businesses and consumers are bearing the brunt of the current global trade war. Now more than ever, the U.S. needs free and fair trade to ensure our nation is able to continue its economic resurgence.”

Meanwhile, inflationary pressures appear to be impacting supply chains at a time when tariffs imposed on steel, aluminum, and a host of consumer goods have come into play. Sixty-eight percent of executives report that they paid higher prices for goods and services, excluding labor, in the fourth quarter, and 71 percent expect to pay higher prices in the next six months. A strong majority indicated they are experiencing inflationary pressures and expect those pressures to continue over the next year-and-a-half. As operating margins become tighter, nearly 60 percent of middle market businesses are currently passing price increases through to their customers.

The survey data that informs the index reading was gathered between October 8 and October 26, 2018. To learn more about the middle market and the MMBI, visit the RSM website.