Middle Market Leaders' Outlook Drops Amid Economic Skepticism

RSM US Middle Market Business Index records lowest level since 2016;

Compensation expected to continue to increase throughout 2019

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Mar 21, 2019, 08:00 ET

CHICAGO, March 21, 2019 /PRNewswire/ -- 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.

The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP 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.

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.

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 41,000 people in 116 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.

SOURCE RSM US LLP