The Trade War Spills Over Into the Middle Market
RSM US Middle Market Business Index declines; 40% of middle market businesses cite negative impacts from trade war
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.
About the RSM US Middle Market Business Index
RSM US LLP and the U.S. Chamber of Commerce have partnered to present the RSM US Middle Market Business Index (MMBI). It is based on research of middle market firms conducted by Harris Poll, which began in the first quarter of 2015. The survey is conducted four times a year, in the first month of each quarter: January, April, July and October. The survey panel consists of 700 middle market executives and is designed to accurately reflect conditions in the middle market.
Built in collaboration with Moody’s Analytics, the MMBI is borne out of the subset of questions in the survey that ask respondents to report the change in a variety of indicators. Respondents are asked a total of 20 questions patterned after those in other qualitative business surveys, such as those from the Institute of Supply Management and National Federation of Independent Businesses.
The 20 questions relate to changes in various measures of their business, such as revenues, profits, capital expenditures, hiring, employee compensation, prices paid, prices received and inventories. There are also questions that pertain to the economy and outlook, as well as to credit availability and borrowing. For 10 of the questions, respondents are asked to report the change from the previous quarter; for the other 10 they are asked to state the likely direction of these same indicators six months ahead.
The responses to each question are reported as diffusion indexes. The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep the MMBI from becoming negative. A reading above 100 for the MMBI indicates that the middle market is generally expanding; below 100 indicates that it is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
About The U.S. Chamber of Commerce
The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. For more information, visit uschamber.com and FreeEnterprise.com, like us on Facebook and follow us on Twitter.
About RSM US LLP
RSM’s purpose is to deliver the power of being understood to our clients, colleagues and communities through world-class audit, tax and consulting services focused on middle market businesses. The clients we serve are the engine of global commerce and economic growth, and we are focused on developing leading professionals and services to meet their evolving needs in today’s ever-changing business environment.
RSM US LLP is the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with 48,000 people across 120 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.