RSM US Middle Market Business Index Shows Economic Improvement Remained Slow in June
The June data indicates the real economy is still mired in a recession, but future sentiment points towards a nascent recovery
RSM US LLP (RSM) – the nation’s leading provider of audit, tax and consulting services focused on the middle market – recently announced results of the June reading for its RSM US Middle Market Business Index (MMBI). Typically a quarterly index, the firm is releasing monthly installments of the MMBI for the duration of the COVID-19 pandemic. The report’s data revealed the MMBI composite score saw a modest increase from 106.1 in May to 108.9 in June, likely caused by the lifting of lockdowns across the country and release of pent up demand.
The middle market is slowly emerging from the pandemic shock, and this month’s results imply that if economic conditions remain favorable, firms are well positioned to step up economic activity over the next six months. While only 21% of survey respondents stated the economy has improved, 56% expect to see improvement over the next six months. Additionally, 54% expect improvements in both gross revenues and net earnings through the remainder of the year, which supports the 43% of executives who intend to increase capital expenditures over the same time period.
“The share of survey participants expecting the economy to improve over the next six months, as well as their outlook for gross revenues and net earnings, is encouraging and points towards a nascent economic recovery – provided that the pandemic does not require massive reversals of reopening and another round of lockdowns,” said Joe Brusuelas, RSM US LLP chief economist. “It is also important to acknowledge that the shape and pace of economic activity going forward will not be driven exclusively by economic and financial considerations. Rather, the direction and evolution of the pandemic and policies put in place to mitigate the spread will be the primary driver of change in overall economic activity and middle market business sentiment.”
While the continued progress is promising, increasing infections associated with the pandemic, the recent easing of economic activity and the leveling off of household spending all present major risks to the near term middle market and economic outlook. Of the 12 middle market industrial ecosystems analyzed in the MMBI, only half appear to have entered growth terrain while the remainder lag behind. This indicates it may take another one to three months before a majority of the middle market emerges from the recession. The six ecosystems in growth terrain include retail trade, finance, construction, transportation, professional business services and wholesale trade while those lagging behind are private services, goods producing, manufacturing, leisure and hospitality, education and healthcare.
Other notable findings for the June MMBI include the uptick in planned borrowing, with 38% of firms saying they plan to borrow over the next six months despite repondents indicating it is more difficult to obtain credit at this time. Furthermore, firms are paying more with the economy restarting as they are unable to pass along price increases. As a result, middle market businesses are closely monitoring their inventories with just 29% of respondents reporting they are currently increasing their stock, and 48% saying they expect to do so over the next six months. Additionally, while current hiring dipped slightly from 28% of firms reporting an increase in May to only 25% in June, 42% of leaders anticipate ramping up hiring over the next six months. The same holds true for employee compensation, with 29% noting an increase in June, and 42% anticipating increases through the remainder of the year.
RSM will continue to publish monthly installments of the MMBI for the extent of the COVID-19 pandemic. To stay informed with the latest insights, ideas and countermeasures to minimize the outbreak’s negative effects as well as prepare for future emergency events, visit RSM’s COVID-19 Resource Center. It also includes information about the $600 billion Main Street Lending Program and related measures from the federal government that are meant to stem the fallout from this global health crisis.
The June MMBI data was collected between June 15 and June 29, 2020.
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 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 51,000 people across 123 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.