The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce, eased slightly to 130.0 in the third quarter from 132.3 in the prior period on a seasonally adjusted basis. The MMBI survey results reflect solid economic and business conditions in the middle market, with large majorities of respondents expressing optimism about improvements in the economy, revenues and earnings for the remainder of 2024.

“Despite noise around a potential end to the current business cycle as growth, hiring and inflation cool, the third-quarter survey of middle market firms implies a sustained period of solid growth within what appears to be a quickly evolving and dynamic portion of the American economy,” said Joe Brusuelas, chief economist with RSM US LLP. “We are optimistic that as interest rates and financial costs ease, we’ll see the release of pent-up demand in business investment and improved revenues and net earnings. Executives that remain stuck in the doom-and-gloom crew are likely to miss a golden opportunity to expand the prospects of their firms.”

Optimistic Outlook Despite Discontentment with Pricing Levels

The MMBI survey results captured a strong sense of forward-looking optimism among middle market executives, but displeasure with the permanent increase in price levels presents an ongoing source of tension for firms. Only 38% of executives said the economy improved during the third quarter and 34% said it remained unchanged. In contrast, 57% of participants said they expect the economy to improve during the final months of 2024 and into the first quarter of 2025.

Middle market executives continued to report strong financial performance in the third quarter, with 45% noting improvement in revenues and 40% indicating net earnings increased. Looking ahead over the next six months, 65% of participants said they expect further revenue gains and 64% expect continued net earnings growth.

Unsurprisingly, 65% of survey participants noted an increase in prices paid in the current quarter, and 67% said they expect to pay more going forward. Similarly, 49% said they had passed along some of those price increases downstream, while 63% said they will over the next six months.

“American businesses are bullish on the economy and the future. Now, we need our elected officials to match that optimism with policies that will support and accelerate economic growth,” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. “Through the November elections and beyond, the U.S. Chamber is outlining policies that would ensure at least 3% annual real economic growth over the next decade.”

Capital Expenditures Remain Strong as Hiring Cools

Supported by sustained improvement in revenues and earnings, the survey found that 44% of middle market firms increased capital outlays in the third quarter and 55% of participants said they intend to over the next six months. As the Federal Reserve begins its policy pivot toward lower interest rates, RSM will monitor the release of pent-up demand among firms looking to purchase a greater quantity of equipment, software and intellectual property.

Interestingly, the third-quarter survey also recorded a notable slowdown in hiring. Only 36% of respondents stated they increased their hiring pace. Fifty-four percent of executives said they expect to hire more individuals going forward, but RSM estimates this increase may not materialize because firms are hoarding labor at higher costs and are likely reaping the rewards of a three-year period of fixed business investment in technology that is bolstering productivity.

Underscoring labor costs, 46% of survey participants indicated they increased compensation to attract labor and 62% said they anticipate doing so going forward. The MMBI report notes that as past capital expenditures bear yields, the result should be slower wage growth and profit margin expansion.

The survey data that informs this index reading was gathered from 404 respondents between July 8 and July 26, 2024.