Q1 2023 Middle Market Business Index

According to a recent survey of executives by RSM US LLP, the middle market continues to see a resilient US economic expansion as companies weather economic headwinds and setbacks.

Moderate inflation and strong household consumption underscored a 9.4-point gain in the RSM US Middle Market Business Index, jumping the top-line figure to 134.0 in the first quarter from 124.6 in the last three months of last year. The survey ran from his January 9th through his January 30th and reflects responses from his 406 senior executives in mid-sized companies across a variety of industries.

“With top-line sentiment up 9.4 points, mid-market companies are optimistic about business conditions at the start of the year. , slowing inflation has fueled optimism in the middle market sector, but as household savings continue to decline, the ability of consumers to spend throughout the year and the impact of a potential decline in household spending must be paid close attention to.”

–Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce, said:

If you had asked a year ago whether the US real economy could absorb the twin shocks of sharp inflation and rising interest rates, the general consensus would almost certainly have been no.

But for now, it’s not. The economy expanded at his 3% pace in the last six months of last year, and strong consumer activity in January shows the current economic expansion is far from over.

The middle market’s ability to withstand these blows reflects the underlying resilience of households and midsize organizations to adapt to the unique reversals that characterize post-pandemic economies.

The rise in the topline index reflects not only resilience but also a sense of security. Overall inflation peaked last June and continues to moderate, with the commodities sector experiencing outright disinflation.

This impacted 53% of respondents who reported an increase in gross income and 49% of participants who reported an increase in net income, up from 42% in the final quarter last year.

Even more impressive, 57% of respondents expect both gross revenue and net income to increase by the middle of the year.

But this combination of resilience and reassurance has bolstered business confidence to the point that it poses some risk going forward as companies have stocked up in the first quarter and the lagged impact of higher interest rates is beginning to subside. I am heightening my senses.

More than half of MMBI respondents, or 53%, say they have strengthened their product inventory.

recession question

The current pace of household consumption, with retail sales up 3% in January, is probably unsustainable. The old-fashioned excess inventory is one of the factors that drives the economy into recession.

We have previously argued that we could see a gradual recession rather than a slowdown if companies cut total private investment.

That restraint was evident in the last three months of last year, when business fixed investment fell 6.7%, driven by a 3.7% decline in capital spending.

Residential investment is down 26.7% in the final quarter of 2022, making the housing sector one of the industrial ecosystems currently in recession.

If the U.S. economy were to go into recession this year, it would most likely be an asynchronous contraction, with housing, manufacturing, retail, and other sectors of the service economy experiencing recession to varying degrees.

However, not all areas of the service sector are similarly unfavorable, so we maintain our basic view of a mild recession this year.

data

Sentiment for the overall economy soared in the survey, with 47% of executives saying the economy has improved, up from 28% previously, and 41% expecting it to improve in the next six months.

A combination of solid demand, lower prices paid, and moderate increases in prices received are most likely behind multiple respondents indicating an overall improvement in economic conditions.

About 69% of respondents said the price they paid had increased from a recent peak of 82% in the third quarter of last year. Overall inflation peaked last June, and mid-market businesses have undoubtedly benefited from a correction in oil and gasoline prices. They are also supported by disinflation in the commodities sector, which is a big reason for the increase in top-line sentiment.

On a note of caution, service sector inflation has yet to peak. Through January he was up 7.6% year-on-year, mainly driven by housing and housing services. Both of these categories are part of a complex chain of factors driving wage growth.

Core service costs, excluding housing, rose 6.18% by the end of January. Both non-shelter and core service costs tend to be sticky, making it unlikely that commodity prices will fall as supply chain disruptions clear up.

Demand was so strong at the beginning of the year that 55% of respondents said they benefited from the price increases they received. About 62% of respondents expect prices to rise in the next six months.

Capital spending continues to be impressive, with 49% of respondents indicating they increased their spending on productivity-enhancing software, equipment and intellectual property during the quarter. 55% of respondents said they plan to do so by midyear.

Both employment and compensation continue to reflect historically tight labor markets, which will most likely dampen the prospects for robust total earnings and earnings.

Of the companies surveyed, 47% increased hiring and 58% used higher compensation to attract the workforce. Looking ahead, 51% of respondents said they would hire more workers, and 63% said they would raise salaries to compete for the labor shortage.

Takeaway

Mid-market business conditions remain solid heading into the middle of the year as businesses continue to adapt, improvise and overcome the major challenges posed by rising interest rates and inflation.

UK’s MMBI Posts Dramatic Jump

“The UK economy has shown remarkable resilience even in the face of record declines in real incomes and the biggest interest rate hike in a generation. The middle market is no exception. Indeed, the RSM UK Middle Market Business Index. rose to 131.4 in the first quarter, up nearly 16 points, the largest in the index’s relatively short history.

“But there are two key risks ahead. First, despite recent resilience, the UK economy is still likely to slip into recession in the first half of this year. The proportion of mid-sized businesses accumulating inventory) has risen significantly.This increase in inventory levels is of particular concern as demand for goods is likely to decline over the next six months as the real economy slips into recession. will be

-Thomas Pugh, The Economist, RSM UK

About Middle Market Mind

We asked mid-market executives to describe the biggest business problems facing their organizations. Here’s what they had to say:

• Choosing the right technology. – Retail Executive

• A major future focus for my organization is labor and skills shortages. – Construction Executive

• Financial management is one of the frequent business problems facing our organizations today. – Utility Executive

• Incorporate robotics and automation. – Production Manager

• Budget constraints, lack of professional training, and poor network infrastructure are the main challenges facing our organization today. – Education Executive

• It is important to focus on inventory management and project management. – Production Manager

• Changing business models and customer retention are issues facing organizations. – Finance Officer

• Hybrid work environments and cybersecurity threats are major issues in IT. – Information executive

• The main issues our company has are outdated technology and supply chain security. – Retail executive

• Slow to adapt to new technology. – Construction Executive

See more Middle Market Index data and visualizations on the RSM website.