Middle Market Leaders' Outlook Drops Amid Economic Skepticism

CHICAGO – (March 21, 2019) – The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, dropped significantly from the 2018 fourth quarter, representing the single largest quarter-to-quarter decline since the index’s inception in the second quarter of 2015. Confidence in the U.S. economic outlook weakened among middle market executives due to concerns about global trade policy, political uncertainty and a tight labor market. Even with this pullback, the outlook remains above the levels recorded in 2015 and 2016.

In the first quarter of 2019, the MMBI experienced a major drop, posting a composite score of 124.1, a 7.9-point decrease from last quarter’s 132. Additionally, for the first time in two years, business leaders’ optimism about the economy dropped below 50 percent, with 45 percent indicating that they expect the economy to improve over the next six months. However, despite a souring economic outlook, 62 percent of respondents anticipate gross revenues to increase somewhat or substantially, and 60 percent are forecasting an increase in earnings during the next six months.

“It is important to note that when we fielded this quarter’s survey, there was some partial overlap with the U.S. government shutdown, which likely had an impact on the results. However, the findings also imply that there are other broad economic factors at work that are making middle market business leaders less optimistic about the future of the economy,” said Joe Brusuelas, RSM US LLP chief economist. “If the uncertainty tax generated by the direction of U.S. trade policy and recent volatility in financial markets doesn’t abate, it may create conditions for an early termination of the current long-running business cycle.”

Tough Economic Conditions Lead to Increased Skepticism
It’s been a rocky start to 2019, with 37 percent of middle market executives indicating that the current economic conditions worsened somewhat, and 32 percent expecting it to worsen in the next six months, which are both record highs for the MMBI. More than half of leaders (61 percent), report that their businesses experienced pricing pressures, and 66 percent anticipate prices paid to increase during the next six months. Forty-three percent of leaders point to improved revenues (down from 55 percent during the prior quarter), and 47 percent report better net earnings (down from 58 percent the prior quarter).

“Tariffs continue to threaten economic growth and create a cloud of uncertainty hanging over U.S. businesses of every size, including America’s middle market companies,” said Neil Bradley, executive vice president and chief policy officer with the U.S. Chamber of Commerce. “The longer tariffs remain in place, the greater the damage to our nation’s economy, and the more we’ll see businesses suffering hits to their bottom line. It’s imperative that Washington’s leaders pursue free and fair trade policies that promote economic growth and job creation.”

Wages Increasing, Hiring Slows
The growing perception of economic weakness in the first quarter of 2019 also affected hiring and compensation conditions in the middle market. Only 39 percent of firms said they would be increasing hiring in the first three months of 2019. However, 50 percent stated they do expect to increase hiring during the next two quarters. Compensation performed better than hiring, with slightly more than half (52 percent) of executives noting that they increased compensation in the current quarter, and 59 percent indicating they intend to do so going forward.

The survey data that informs the index reading was gathered between Jan. 14 and Feb. 1, 2019. To learn more about the middle market and the MMBI, visit the RSM website.

Cybersecurity on the Rise
Middle market leaders have become increasingly concerned with cybersecurity and data privacy, with more than half (55 percent) asserting that an attempt to illegally access their data or systems is likely in 2019—a significant increase from 2018 (47 percent). Additionally, 68 percent of middle market organizations currently have a dedicated function focused on data security and privacy.

The risk of cybercrime for middle market businesses is the topic of RSM’s upcoming MMBI special report on cybersecurity, which will be released in April 2019.