The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP ("RSM") in partnership with the U.S. Chamber of Commerce, posted a reading of 129.7 for the final quarter of 2021, which is an expected decline from the index's all-time peak of 143.7 in the previous quarter. The data reflects the slowing U.S. economy, though the middle market is optimistic about the six months ahead, with the majority of survey respondents noting expected increases in revenues and hiring. The current reading is in line with the pre-pandemic score of 126.2 in the final quarter of 2019.

"While we anticipated this easing, we also expect a re-acceleration in household spending and higher fixed investment by businesses to close out the year," said Joe Brusuelas, RSM US LLP chief economist. "Looking ahead, it's likely that middle market business conditions will remain solid even as firms work to confront challenges in securing materials and workers. Prices paid and prices received are very strong, and we expect this to continue until supply chain difficulties are resolved."

As has been the case for some time, middle market firms continue to be optimistic about future revenues, net earnings and the overall economy compared to the somewhat dour current outlook. Only 37% of respondents indicated the economy had improved in the current quarter, even as 51% anticipated general improvement through the first half of next year. Forty-five percent of executives reported higher gross revenues over the past three months, while 68% stated they anticipate revenues to accelerate in the next six months. Similarly, roughly 43% of respondents reported an increase in net earnings over the past three months and 62% indicated they expect an improvement through the end of next year's second quarter.

Pricing Pressures are Primary Challenge for Middle Market
The primary concern among middle market businesses revolves around the cost of goods used at earlier stages of production and the cost of intermediate goods, as well as challenges around passing along those price increases. In the current quarter, 58% of respondents noted they increased prices charged (prices received), down from 60% in the third quarter, while 66% indicated they expect to do so over the next six months, which is also down modestly from 69% in the second quarter. While that is an improvement, RSM does not expect any material relief on the supply front until the second half of next year.

Prices paid in the current quarter and expectations for prices paid in the coming quarters also rose modestly in the survey, remaining at elevated levels. Roughly 72% of participants in the survey noted an increase in prices paid, and 70% implied they expected to pay more for goods used in production and to provide services over the next 180 days.

"This quarter's survey demonstrates the resiliency of the middle market. Despite continued inflationary pressures and supply chain difficulties, more than half of middle market leaders expect revenues and earnings to increase in the coming months," said U.S. Chamber Executive Vice President and Chief Policy Officer Neil Bradley. "However, the middle market sector does remain strained by persistent high inflation. Almost three in four businesses reported paying higher prices for goods. It's critically important that policymakers in D.C. do not slow the recovery through tax increases and government spending that would only impede our path to full employment and economic growth."

As middle market firms grapple with pricing pressures, they're also adapting to shifting workforce demands. During the current quarter, 54% of respondents indicated they increased compensation to obtain workers and 68% implied they would increase pay to attract workers moving forward. Fifty-six percent of survey participants stated they will increase hiring over the next six months.

Remote Work is Taking Hold in the Middle Market
Responses from this quarter's MMBI also revealed that middle market businesses are embracing flexible work models and remote work, with more than a third of respondents stating they now have employees working remotely who weren't doing so prior to the onset of the pandemic in March 2020. Of those, 65% are embracing hybrid work, allowing their employees to work in the corporate workplace part of the time and in remote locations for the remainder.

Midsize companies are also gearing up for recruiting difficulties, with nearly 75% of respondents stating they expect the labor environment for their business to be very challenging or extremely challenging in the coming year. The post-COVID-19 work environment for middle market businesses is the topic of RSM's upcoming MMBI special report, which will be released in January.

The survey data that informs this index reading was gathered between October 4 and October 21, 2021.

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 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.