The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, eased to 124.2 in the fourth quarter, down 12.5 points from the previous quarter. While the index remains at a level that signals expansion and reflects the resilience of the broader economy, the decrease in topline sentiment indicates that two years of rising prices are taking a toll on overall business conditions and expectations around revenues, net earnings and hiring.

“The fourth quarter MMBI reading doesn’t show that the American economy is in a recession, but an array of economic indicators implies the economy is decelerating into the end of the year,” said Joe Brusuelas, chief economist with RSM US LLP. “This slowdown underscores our estimation of a 65% probability of a recession over the next 12 months, and we think the lagging impact of interest rate hikes – which have already resulted in significant financial tightening – will become apparent in a sharp economic drop-off early next year. Middle market firms need to prepare for a pronounced slowdown in demand in the near term.”

Middle Market Sentiment Sours as Economic and Business Conditions Worsen

All 10 components of the RSM US Middle Market Business Index declined from the third quarter to the fourth, reflecting growing pessimism about the economy.  

Persistent and elevated inflation has eroded consumer purchasing power and dampened business confidence, which is observable in executives’ responses to questions about their current outlook on the economy, hiring, revenues and net earnings. A sharp increase in respondents reporting a reduction in revenue (29%) and profit (33%) from the previous quarter, up from 19% and 24% respectively, should serve as a bellwether for firms to begin preparing for the end of the business cycle.

“The year’s final Middle Market Business Index shows that persistently high inflation is souring businesses’ perceptions about the strength of the economy in the near term,” said U.S. Chamber Executive Vice President and Chief Policy Officer Neil Bradley. “With respondents showing revenue, earnings and hiring expectations falling, it is absolutely critical that policymakers do all they can to put a stop to inflation.”

Plans for Capital Expenditures and Hiring Slow as the Ability to Increase Prices Wanes 

The survey results imply that pricing pressures did not intensify in the fourth quarter and the ability for middle market businesses to pass along price increases appears to be ebbing. Roughly 53% of respondents noted an increase in prices received in the fourth quarter, down from 69% in the previous quarter.

Roughly 50% of survey respondents said they intend to increase capital expenditures over the next six months, following eight straight quarters in which a majority said they intended to do so. This data is encouraging, as businesses that are continuing to hire, raise wages and invest despite expectations of a poor economy are helping keep the economy afloat. The MMBI report cautions that as uncertainty rises, companies may be tempted to pull back on critical investments, but boosting innovation and technological capability during a downturn bolsters productivity and is a necessary component of business operations.

The survey results also indicate the period of above-trend job growth driven by the pandemic recovery is ending, as the percentage of respondents stating they plan to reduce headcount reached its highest level since 2020. In the current quarter, 14.1% stated they plan to make workforce reductions, up from 6.5% in the third quarter. Just over half of the respondents reported plans to increase hiring over the next six months, the lowest rate since mid-2020.

Hybrid and Remote Work Options Appear to be Permanent

Responses to special questions in the latest MMBI survey show that middle market companies appear to be permanently adopting the remote and hybrid work practices that were driven by safety measures during the height of the COVID-19 pandemic.

Nearly three-quarters (74%) of executives polled said their companies had rolled out a hybrid work option, up nine points from the fourth quarter of 2021. More than half (54%) of businesses have made remote work a permanent option for some employees on a full-time basis, up from 48% a year earlier.

More details about these changes and executives’ outlook on staffing for the next year will be featured in the RSM US Middle Market Business Index special report on the workplace and hiring, scheduled for publication in early 2023.

The survey data that informs this index reading was gathered from 408 respondents between October 3 and October 21, 2022.

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 approximately 1,500 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 asks 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.