The Q2 2024 RSM US Middle Market Business Index (MMBI) rose to 132.0 in Q2 from 130.7 in the prior quarter on a seasonally adjusted basis. This reflects a sustained business expansion characterized by historically low unemployment, strong household consumption and robust business revenues. The Middle Market Business Index is created in partnership with the U.S. Chamber of Commerce.
A sustained business expansion characterized by historically low unemployment, strong household consumption and robust business revenues continued to provide a tailwind for the American real economy in the second quarter.
Key findings include:
- Economy: 40% of middle market executives noted an improvement in the economy, while 32% said conditions had deteriorated. RSM estimates this is due to the long tail of the pandemic and subsequent price shock extracting a powerful toll on smaller firms.
- Revenue: Nearly half of respondents said their gross revenue (47%) and net earnings (45%) improved in the second quarter and 68% said they expect an improvement in gross revenues over the next six months.
- Hiring: Hiring remained consistent with Q1, as 44% of executives noted they had increased hiring. 74% of executives reported they are significantly or somewhat concerned about access to skilled labor; 75% hsaid the same about the cost of labor.
- Prices: MMBI data suggests that prices have steadied. 71% of executives said they paid higher prices for goods and services, while 67% expect to do so in the next six months. More than half (52%) said they passed along those higher prices.
- Borrowing: The ability of midsize firms to access capital necessary for expansion improved significantly in the second quarter, with 29% of firms indicating that borrowing had become less tight, up from 20% earlier in the year.
Since rebounding from the trough of the pandemic, the index has moved in a range of 125.5 to 140.7, which compares favorably to the pre-pandemic range of 117.3 to 138.4. The survey's high, posted in the third quarter of 2021 as the economy snapped back from the pandemic shutdown, was 140.7.
Despite the modest improvement in confidence in the second quarter, 40% of executives surveyed indicated that the economy had improved; 32%, by contrast, said conditions had deteriorated.
In the report's estimation, the long tail of the pandemic and the ensuing price shock has taken a powerful toll on smaller firms, which continue to face a challenging environment of higher wages and input costs.
Inside the MMBI report
The financial performance for middle market firms remained strong in the second quarter, the survey found. An improvement in net earnings and revenues led a majority of executives to report that they intended to boost productivity-enhancing capital expenditures over the next six months. Starting from Q4 2020, this was the 15th consecutive MMBI survey that found such an intent.
Companies' willingness to invest is helping fuel a productivity boom that is currently working its way through the American economy. If it continues, this will lead to a virtuous cycle of improved growth, low unemployment and price stability.
Nearly half of respondents, or 47%, indicated that gross revenues had improved, while 45% said that net earnings increased. Far fewer, 25% and 26% respectively, said that revenues and earnings had deteriorated. Looking ahead, 68% of survey participants said they expect gross revenues to improve over the next six months, and 61% said the same about net earnings.
This is most likely a big reason why 53% of respondents indicated they expect the general economy to improve. While we remain confident in the direction of middle market capital expenditures, 65% of executives indicated a real and abiding concern about the cost of capital.
That concern puts more focus on upcoming decisions by the Federal Reserve on its policy rate—we forecast two rate cuts of 25 basis points each this year, starting in September. The Fed's decisions will largely shape the duration and intensity of the current business expansion.
Approximately 24% of MMBI respondents indicated that they expect rates to remain unchanged over the next year; 54% expect rates to increase; and 22% anticipate a decrease.
Employment and compensation
Overall hiring levels remained constant in the second quarter, with 44% of executives saying they had increased hiring, unchanged from the previous quarter.
At the same time, 17% said they had slowed hiring. We expect hiring to slow somewhat, to a more sustainable pace, in the second half of the year as economic growth eases to a 2.4% average pace for the full year.
But a tight labor market has caused firms to offer greater compensation to attract and retain talent. Over 8 million job openings remain unfilled, which translates to 1.3 job openings for every unemployed worker. About three-quarters, or 74%, of executives in the MMBI survey indicated that they are significantly or somewhat concerned about access to skilled labor; 75% said the same about the cost of labor.
It's no surprise, then, that 57% of executives said they had increased compensation in the second quarter and 61% expect to do so in the second half of the year.
View the Q2 2024 RSM US Middle Market Business Index here.
SOURCE: RSM US
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