The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP ("RSM") in partnership with the U.S. Chamber of Commerce, remained essentially unchanged, inching down to 129.3 in the third quarter from 131.1 in the prior quarter on a seasonally adjusted basis. The MMBI survey results align with overall business conditions, as the U.S. economy in the third quarter looks to be expanding in line with its long-term trend of 1.8% amid stabilizing prices, solid demand and a robust job market that presents a challenge to firms looking to grow.

"One of the hallmarks of economic expansion over the past two years has been a divergence between current and future views of the economy, which is reflected in this quarter's MMBI data," said Joe Brusuelas, chief economist with RSM US LLP. "While current evaluations remain dour, the forward look on the economy, revenues, earnings and even pricing remains rock solid, indicating a rising probability of a soft landing for the U.S. economy following the twin shocks of inflation and higher interest rates."

Forward-looking Sentiment Remains Optimistic in the Middle Market
The middle market evaluation of the current economy remains dour in the third quarter while sentiment is more optimistic about the future. Tempered by the permanent increase in prices of most goods and services, only 35% of respondents in the MMBI survey indicated that the economy improved in the current quarter. Nearly 60% stated they are expecting improvement over the next six months.

Underscoring the possibility of a soft landing for the U.S. economy, 70% of surveyed executives said they expect revenue to rise over the next six months and 68% anticipate an improvement in net earnings over the same period. With a confident forward look, 63% of respondents also expect to increase outlays on productivity-enhancing capital expenditures. In contrast, for the current quarter, only 42% of respondents reported improvement in gross revenues, 40% experienced a rise in net earnings and 42% said they increased capital spending.

"Middle market businesses are bullish about the future for their companies and the economy," said Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce. "They are planning to put money behind that optimism adding new employees and expanding their infrastructure. However, a tight labor market and credit restrictions could dampen those plans. Policymakers can help, by expanding the workforce and by ensuring that new regulations don't limit access to credit."

Labor Continues to Challenge Middle Market as Firms Adjust to Higher Pricing Levels
The torrid pace of hiring that characterized the economy over the past two years is now gradually cooling, and MMBI data shows this is true for midsize organizations. Roughly 38% of respondents indicated they increased hiring during the current quarter, down from 49% in the prior period. Sixty percent stated they intend to add workers in the coming months. However, competition for labor is expected to remain intense, with 68% of executives planning to boost wages to attract workers over the next six months. Forty-five percent said they did so in the current quarter.

Labor costs, which traditionally account for roughly 70% of all business costs, are being passed downstream in the form of higher prices. Seventy percent of executives indicated they paid more for all goods and services in the current quarter, and 74% expect to do so in the near term.

The MMBI survey results imply the economy has reached a point where firms are in the final phase of passing along those costs. Only 44% of participants indicated they raised prices in the current quarter, and 64% indicated they anticipate doing so over the next six months, down from 70% during the previous quarter and the cyclical peak of 77% in the third quarter of 2022.

The survey data that informs this index reading was gathered from 416 respondents between July 5 and July 25, 2023.