The Trade War Spills Over Into the Middle Market

CHICAGO – (September 9, 2019) – The third quarter RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, found that 40% of middle market leaders reported that tariffs on imported goods are posing challenges for their businesses and 26% cited a negative impact from retaliatory export tariffs. The overall index score dropped to 129.4 from the 132.3 recorded last quarter, as overall global economic growth slowed and the trade war escalated.

“It is becoming increasingly apparent that policy issues like the trade war are quickly permeating through every facet of the economy and posing widespread challenges for companies of all sizes,” said Joe Brusuelas, RSM US LLP chief economist. “The middle market is a critical sector of the economy, comprising 40% of U.S. GDP and accounting for more than 40 million jobs. While current quarter sentiment remains solid, forward-looking indicators in the survey’s subindices denote some risk for middle market businesses in the months ahead—particularly since this survey was fielded prior to the most recent escalation of the trade war and subsequent impact on the financial markets.”

Gross revenues and net earnings continued to grow in the current quarter, but the index indicated directional declines in capital investments and hiring. Capital expenditures remained sluggish, with less than half (44%) of executives disclosing increased investments in Q3. Additionally, the total percentage of leaders reporting an increase in hiring was similar in Q3 to Q2 (46% vs. 47%). However, a decline was shown in respondents’ expectations of hiring during the next six months (47% vs. 54%). Perceptions of overall economic performance have also decreased for both the current quarter and future outlook, with the majority of respondents (54%) saying they do not expect the economy to improve in the next six months.

Policy Represents Both Challenge And Opportunity For Middle Market Leaders
Some policy issues are creating challenges for the middle market, with leaders reporting new tariffs (44%), cybersecurity regulations (33%) and state or local regulatory changes (31%) as their biggest policy concerns. However, middle market leaders also shared thoughts on policies that could benefit their businesses, including: infrastructure spending to update roads, bridges, water and sewage (39%), infrastructure spending to update communications and/or energy grid (33%) and making temporary provisions of the 2017 Tax Cut and Jobs Act (TCJA) permanent (33%).

“Rising tariffs and policy uncertainty are preventing midsize businesses – who employ millions of Americans – from investing and growing,” said Neil Bradley, U.S. Chamber of Commerce executive vice president and chief policy officer. “To guard against a possible recession, policymakers need to restore economic certainty, and that means deescalating trade tensions with China, passing USMCA and investing in the future through an infrastructure package.”

To address these policy challenges and opportunities, some middle market executives are turning to policymakers for support. In fact, more than one fourth of respondents reported increased interaction with policymakers and political representatives at the federal (29%), local (34%) or state (38%) level.

The survey data that informs the index reading was gathered between July 15 and August 2, 2019. To learn more about the middle market and the MMBI, visit the RSM website.