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Middle Market Optimism Declines for First Time Since Election

September 21, 2017, 08:00 AM
Filed Under: Economic Commentary

In a first sign that middle-market businesses are losing confidence in President Donald Trump, a key indicator of middle-market confidence experienced its first decline since the 2016 election.  

The RSM US Middle Market Business Index (MMBI), presented by RSM US LLP in partnership with the U.S. Chamber of Commerce, announced the index declined in Q3 2017, following a record-high reading in Q2 2017. The decline comes after three consecutive quarters of growing business optimism in the middle market, indicating improvement during the past year was likely the result of stronger economic fundamentals and the recovery in corporate earnings predating the 2016 presidential election.

The data and corresponding survey questions indicate middle market leaders are still experiencing strong economic and business conditions, but may pull back on some investments due to the lack of progress on substantial policy reform. While optimism on whether infrastructure spending will occur in the next two years has receded, middle market leaders report it would have a positive impact for businesses.

In Q3 2017, the MMBI posted a composite score of 125.7, down 6.4 points since Q2. While the decline erases much of the bump in middle market business optimism following the election, it is still more than 10 points higher than Q3 2016. A reading above 100 indicates an expanding middle market.

Optimism on Infrastructure Spending Remains

Despite waning overall business confidence, the U.S. middle market remains hopeful about the potential for infrastructure spending and enthusiastic about the benefits such projects will bring to their business.  More than 70 percent of middle market business leaders believe that investment in telecommunications networks (including security of these networks), roads and highways, the national energy grid, bridges, viaducts and overpasses, airports, and water and sewer systems would improve their day-to-day operations. In addition, more than 65 percent of these business leaders believe that improvements to telecommunications networks (including security of these networks), roads and highways and the national energy grid would represent opportunities for their business, and 59 percent of those who ranked one or more items as a significant opportunity would plan to participate in the bidding process for those projects.

Tight Labor Market Creating Headwinds for Hiring

When it comes to business planning, the MMBI showed executives remain optimistic but are hesitant to commit to certain investments. More than half reported improved gross revenues, and 65 percent anticipate an improved gross revenue outlook in the next six months. However, fewer executives reported improvements in hiring conditions this quarter over last, pursuant to challenges of an extremely tight labor market. Nearly three in four reported trouble filling skilled positions. And while 56 percent of respondents expected to increase compensation in the Q2 2017 report, only 40 percent reported they did this quarter, and less than half plan to in the next six months.

"Despite widely reported hiring challenges across many business sectors, MMBI results show the middle market has continued to expand and is generally reporting a positive outlook for the year ahead," said RSM US LLP Chief Economist Joe Brusuelas. "However, the real economy is also sending a message to Washington that they need a clearer picture on the policy front before making key decisions around hiring, compensation and capital expenditures – all of which can make a significant impact on the U.S. economy."

"We're counting on Congress to pass tax reform and continue advancing a pro-growth economic agenda that will grow middle market businesses, and the broader business community," said U.S. Chamber of Commerce Middle Market Business Council Executive Director Tom Sullivan. "The U.S. Chamber will continue to advocate for the reforms and polices that address the challenges these businesses face and encourage business investment, accelerated growth, and job creation."

The survey data that informs the index reading was gathered between July 7 and August 4, 2017. To learn more about the middle market and the MMBI, visit the RSM website.


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