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.
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 more than 43,000 people in over 120 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.