Middle Market Outlook Soars, RSM US Middle Market Business Index Reports

The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, climbed to an all-time high in the 2018 first quarter, with business leaders bullish on economic strength, the arrival of large tax cuts, a strong labor market, and increased spending they believe will be reflected on the bottom line. The report marks a record-high on both current and forward-looking economic conditions, signaling leaders are confident the economy will remain a strong environment for business over the next six months.

In the first quarter of 2018, the MMBI posted a composite score of 136.7, a 4.5-point increase overtaking last quarter’s 132.2 record. (A reading above 100 indicates an expanding middle market.) The report comes amidst an incredibly tight labor market, yet 58 percent of business leaders report plans to increase hiring over the next six months.

“This quarter’s MMBI findings correspond nicely with the direction of fundamental hard data, soft data and anecdotal evidence we’re seeing nationwide,” said Joe Brusuelas, RSM US LLP chief economist. “The U.S. economy is growing well above its long-term trend of 1.5 percent amid a tightening labor market that’s fueling wage growth. This could lead to potential near-term middle market economic headwinds as the difficulty in finding skilled, semi-skilled and public-facing labor increases as does the potential for ongoing trade spats that risk escalating into a full-blown trade war.”

In an effort to attract talent in these labor conditions, 62 percent of middle market leaders report plans to increase compensation over the next 180 days; 49 percent reported doing so during the current quarter.

“The middle market employs forty million Americans and a majority of these are planning to raise wages for their employees. This is great news for American families and further proof that pro-growth policies like deregulation and tax reform work,” said U.S. Chamber of Commerce Middle Market Business Council Executive Director Tom Sullivan.

Revenue on the Rise Amidst Inflation Expectations

According to the report, revenue expectations remain strong, with 75 percent of middle market leaders expecting increases in the next six months. Middle market executives also reported fresh cyclical highs on increased prices received versus the last quarter and expectations over the coming six months, indicating middle market businesses believe they have sufficient market power to begin passing price increases to customers downstream.

Lack of Investment in Digital Economy Emerges as Concerning Trend

Despite a track record of increasing optimism, middle market businesses remain hesitant on capital expenditures, a concern as the digital economy constantly demands more advanced technology and could leave mid-sized companies struggling to catch up. A lag in capital expenditures has been a theme for middle market businesses over the past few quarters; despite strong reports on profits, revenues and economic outlook, less than half of middle market executives reported increasing capital spending this quarter.

“Now is the time for middle market companies to invest in their businesses, as for many companies, the new tax rate is likely the lowest in their lifetime,” added Brusuelas. “It is paramount the middle market begins to get ahead of the curve of the coming disruption to their industries. The primary way to do that is to invest in software, equipment and intellectual property.”

The survey data that informs the index reading was gathered between January 12 and February 5, 2018. To learn more about the middle market and the MMBI, visit the RSM website.

A special addendum to this quarter’s MMBI focused on cybersecurity will be released in April.