Business conditions in the real economy deteriorated in the final quarter of the year as the top-line RSM US Middle Market Business Index fell 12.5 points to 124.2 from 136.7.
While that figure continues to show expansion and is at a level that reflects broader economic resilience, the two-year rise in prices has clearly affected not only overall business conditions, but also earnings, net income and employment expectations. giving a blow.
For the seasonally adjusted index, the latest quarterly change is significant at both the 0.10 and 0.05 levels.
While the mid-market index doesn’t suggest that the economy is in recession (we think numbers below 110 tend to indicate that), a range of economic indicators show that the US economy is heading towards the end of the year. It shows that you are slowing down. This slowdown supports our estimate of a 65% chance of a recession over the next 12 months.
Persistent inflation in the services and housing sectors has pushed the Federal Reserve to aggressively raise policy rates. By the time the hikes are finished, the Fed will try to restore price stability, so he is almost certain to raise the policy rate by more than 500 basis points over the next 15 months.
The US economy is not slowly slipping into recession. Rather, they tend to fall off cliffs. We believe the delayed impact of rate hikes, which have already resulted in significant monetary tightening, will be evident in a sharp decline early next year after the traditional holiday spending period ends.
Our estimate is that mid-market companies should prepare for a significant slowdown in demand in the near term.
It is important that businesses during this time continue to make significant investments in capital expenditures to boost productivity during the imminent period when the economy slows and inflation begins to decline.
We recognize that increased uncertainty about earnings and net income during a recession often discourages investment. Still, the economy has not reached that stage. Nearly 50% of respondents to the MMBI survey said they intend to increase their capital spending over the next six months. This strong result follows his eighth straight quarter in which a majority said they intend to. The data is encouraging and represents a much-needed reality check for all midmarket companies.
The split between business expectations of the economic downturn and their willingness to continue investing follows a growing narrative of ‘second-hand pessimism’. Businesses feel bad about the economy, but they continue to hire, raise wages, and invest as if the economy is strong. This disparity between feelings and actions helps keep the economy afloat, because actions speak louder than words when it comes to growth.
However, this prospect may not last long. Companies facing heightened uncertainty will be tempted to refrain from making critical investments in their companies and people.
This is a critical suboptimal business decision that leads to lower productivity and yield.
Enhancing innovation and technological prowess during a downturn is a necessary part of running a business. Avoiding these investments is simply not for beginners.
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All 10 components of the RSM US Middle Market Business Index were down from Q3 to Q4. This reflects growing pessimism about the economy.
This change in outlook is due to the recent deterioration in the business environment. The sharp increase in respondents reporting lower revenues and profits from the previous quarter should herald the start of companies preparing for the end of the economic cycle.
Persistent and high inflation is eroding consumer purchasing power and eroding business confidence. We see its erosion in the current outlook for the economy, jobs, earnings and net income.
The staffing outlook also deteriorated in the fourth quarter. Just over half of respondents reported plans to increase hiring over the next six months, the lowest percentage since mid-2020.
Stocks planning to cut jobs rose from 6.5% in Q3 to 14.1% in Q4. This is also his highest since 2020. The period of above-trend job growth driven by the recovery from the pandemic is coming to an end.
According to MMBI respondents, price pressure did not increase in the fourth quarter. His 53% of respondents with price increases from Q3 to Q4 is the lowest share since the first half of 2021. In the first half of 2021, consumer demand surged and concentrated, rapidly overwhelming global supply chains. Respondents reported similar mitigation when asked about the prices paid for inputs used in their businesses.
Perhaps the biggest takeaway from the price data is that the ability to communicate price increases to consumers is starting to wane. About 53% of respondents said prices were up from 69% of him in the third quarter.
Earlier, we pointed out that the main driver behind the improvement in top-line sentiment in the third quarter was likely the ability to pass on price increases. At the same time, management told his RSM that passing on these high prices was not sustainable and would be over at some point.
It seems that the end is near.
Hybrid and remote work options seem permanent
According to MMBI data, midsize businesses appear to have perpetuated remote and hybrid work practices driven by safety measures at the height of the COVID-19 pandemic.
Nearly three-quarters (74%) of executives surveyed say their companies have rolled out hybrid work options, up nine percentage points from Q4 2021. Those who hadn’t done so before the health crisis were down just 3 percentage points from his 36% the year before, according to responses to the survey’s special question.
More than half (54%) of businesses have made remote work a permanent option for some full-time employees, up from 48% last year. Only one in four of her respondents said her organization required her workers to return to the office remotely.
Culturally, changes in working styles seemed to have a positive (39%) or no (38%) impact on the majority of companies, while 24% said they had a negative impact. I was.