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 131.3 in the second quarter, down modestly from 134.0 in the first quarter on a seasonally adjusted basis. This top-line sentiment indicates that despite a variety of shocks to the real economy over the past two years, overall business conditions remain solid. The 131.3 reading is in line with the 2017−2020 period before the pandemic, when the middle market generally thrived following steep federal tax cuts, a large increase in federal spending and low interest rates.

"Resilience – not recession – is the primary takeaway from this quarter's survey results," said Joe Brusuelas, chief economist with RSM US LLP. "The easing in topline sentiment reflects executives' views on the current economy, which has been tempered by lingering inflation, higher wage costs and the recent disruption among small and regional banks. The survey results show a clear divergence on sentiment when looking ahead over the next six months – likely because we're capturing an economy in transition."

This quarter's MMBI survey was fielded during a period of financial stress among small and midsize banks that serve many middle market firms, and some of the current evaluations of the general economy differ from the more optimistic views expressed in the survey.

Middle Market Sentiment Optimistic about Second Half of 2023

During the second quarter, evaluations of the economy soured, with only 35 percent of survey participants indicating an improvement in the general economy and 42 percent saying it had deteriorated. Fifty-two percent of respondents said they expect an improvement in the general economy in the second half of the year, which RSM attributes to sustained demand by U.S. households for goods and services.

Though lingering inflation is contributing to a general compression in profit margins across the economy, expectations on revenues and net earnings remain strong. In the current quarter, 42 percent of respondents said gross revenues improved, down from 53 percent in the first quarter, while 44 percent indicated an improvement in net earnings, which is down from 49 percent. Survey answers imply that 70 percent of surveyed executives expect improvement in gross revenues over the next six months and 65 percent assume that net earnings will improve over the next six months.

"Middle market firms' optimism about revenue and earnings as well as increased capital expenditures reflects an underlying confidence in business conditions looking ahead," said Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce. "Maintaining a healthy credit supply to service this optimism is vitally important to protecting economic growth as companies face continued interest rate, inflation, and workforce challenges."

Seventy-nine percent of respondents said they paid higher prices, which is up from 70 percent previously, while 79 percent expect to pay higher costs over the next six months. For prices received, 57 percent of respondents indicated they had passed along higher prices to customers, with 70 percent expecting to do so in the second half of the year.

Middle Market Strength Demonstrated by Labor Market and Capital Expenditures

One continuing sign of strength in the MMBI survey has been firms' willingness to invest in productivity-enhancing capital expenditures. Almost half, or 46 percent, said they increased business investment and 60 percent expect to do so through the end of the year.

The most robust element of the American economy right now is the labor market. Not surprisingly, hiring and hiring intentions remain stout, with 50 percent of respondents saying they increased hiring and 62 percent indicating they intend to do so over the next 180 days. Fifty-eight percent of survey participants said they increased compensation and 72 percent said they intend to do so in the near term.

The survey data that informs this index reading was gathered from 404 respondents between April 3 and April 24, 2023.