The new political landscape has injected unprecedented confidence into the middle market, with 70% of executives saying they expect the economy to improve over the next six months -- compared to just 37% who said the same at the end of 2016.

That's according to a new report released by advisory firm RSM. The RSM US Middle Market Business Index (MMBI) posted a record high of 129.8 in the first quarter, up sharply from 120.1 in the fourth quarter of last year. The jump reflects the underlying fundamental improvement in economic conditions during the past several months and respondent expectations for significant tax reform and regulatory relief this year.

Roughly half of respondents expect to increase capital expenditures in the next six months. That is roughly on par with findings from the fourth quarter of 2016, but 11 percentage points higher than survey results gathered in July, the month Donald Trump officially became the Republican Presidential nominee. Forty percent expect their inventory levels to increase.

"Middle market businesses are aggressively factoring in sweeping policy changes this year by the Trump administration and Republican-controlled Congress," said Joe Brusuelas, Chief Economist, RSM US LLP. "While their optimism will have a near-term positive impact for the economy, that could turn quickly if policymakers fail to deliver on the promised scope and scale of change."
Brusuelas attributed record levels of optimism to sustained improvement in the labor market, rising wage gains and the rebound in overall manufacturing conditions.

"All of the industrial sectors that we survey reported robust business conditions, with manufacturing, wholesale trade, information, professional business, leisure and hospitality and goods-producing areas of the economy all posting readings above the overall topline index reading," he said.

Since the first quarter of 2015, RSM has collected data on middle market firms through quarterly surveys administered by Harris Poll. The survey is conducted four times a year, in the first month of each quarter: January, April, July and October. The survey panel, the Middle Market Leadership Council, consists of 700 middle market executives, and is designed to accurately reflect conditions in the middle market. The data for each quarter are weighted to ensure that they correspond to the U.S. Census Bureau data on the basis of industry representation.

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. RSM defines the middle market as nonfinancial or financial services firms with annual revenues of $10 million to $1 billion.

The MMBI, developed in collaboration with Moody's Analytics, is borne out of the subset of questions in the survey that ask respondents to report the change in a variety of indicators. Read the report in its entirety here.