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Directory summary
BusinessThat’s not to say there’s no slowdown in the U.S. real economy in the third quarter, as the middle market remains on a growth path, even as the market struggles with higher inflation. Top-line sentiment among mid-sized executives improved 7.3 points from the second quarter to an adjusted index reading of 138.5. That change is significant at both the 0.10 and 0.05 levels. Such a strong reading suggests the economy, with business conditions that gained 3.4 million jobs in the first seven months of the year and unemployment at 3.5%, is not in line with recession.
The main economic narrative emerging from the data is that strong overall activity continues to support strong business sentiment. This volatility, however, is clearly tempered by higher prices and wage increases, which could cloud companies’ outlook on the economy now and over the next six months. Still, with revenues and net income still strong, and most MMBI respondents indicating improvement, the prospect of a recession has probably been pushed back to 2023.
Of the 10 underlying components that comprise MMBI, seven advanced from the second quarter to the third, while three declined. The three declining segments asked respondents their expectations for the next six months, and their low showings corresponded to macroeconomic data elsewhere. Businesses and households are feeling pessimistic about inflation and the risks associated with the economy.
Despite two consecutive contractions in quarterly GDP in the first half of 2022, business conditions look remarkably resilient over the horizon. Forty-eight percent of respondents said gross revenue improved in the third quarter, and 60% expected to do so in the next six months. Half of survey participants indicated improvements in net income in the third quarter, and 59% said they expect improvement in the near term.
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48%
Gross revenues showed improvement in the third quarter.
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41%
Increases capital expenditures that increase productivity
Passing price increases downwards.
Perhaps more importantly, the majority of survey respondents indicated that they are passing on price increases — and that being able to do so for now is bolstering revenues, net income, and the future prospects of both. Only 7 percent of respondents said they were struggling to make ends meet following a price hike, which is remarkable given the declining inflation rate in the economy. Given the tough conditions middle market companies are currently navigating, this figure is good news.
At the network, respondents reported increases in revenue and profits from the previous quarter, both the highest in a year. Some of this growth, particularly the increase in revenue, was driven by selling prices. More than 7 in 10 survey respondents reported an increase in their highest average selling price on record. In our view, the ability of middle-market firms to pass these prices without creating demand-destroying conditions increases.
Just as important, and a source of continued optimism in the middle market and real economy, are reactions around capital expenditures. Forty-one percent of survey participants increased productivity-enhancing capital expenditures in the third quarter, and 53% indicated they expect to do so in the next six months. Mid-market companies increasing their investments in technology and their people are critical to increasing efficiency and productivity in a time of tight labor supply and high inflation.
Wage pressure and strict labor
The main source of inflation for service industries, which have a large presence in the middle market, comes from wages. The share of respondents saying workers’ compensation has increased has risen from 2 in 3, a record high. Rising wages force businesses to pass on rising input costs to their customers. According to the government’s employment price index, wages rose 5.2 percent in the second quarter from a year earlier. Wage pressure will continue to weigh on business decision makers as the share of MMBI respondents who said they plan to increase hiring levels in the next six months declines.
Wage growth and input prices are high In our view, only 30% of survey respondents said the economy improved in the third quarter, and only 39% expected it to continue.
Cautious optimism
Data related to recent employment trends, however, is still floating. Nearly 6 in 10 MMBI respondents said staffing had increased in the past three months, the highest share on record; Meanwhile, those reporting headcount declines hit a three-year low in the third quarter.
As of July, overall employment in the U.S. economy has returned to pre-pandemic levels, and we continue to see labor market dynamics in the near term characterized by a stronger labor market and higher wages than in the past generation. . Any notion of a return to labor market conditions from the unemployment recovery of the 1990s or the 2007-09 global financial crisis must be closely scrutinized and directly tested.
Looking forward, 41% of respondents said they plan to increase their borrowing in the next six months. Given the expected rise in interest rates over that period, this finding warrants monitoring of the underlying health of the real economy.
Finally, 48% of surveyed organizations increased inventory levels in the third quarter, and 55% said they expect to do so in the near future, indicating the importance of meeting the upcoming holiday season and the still-unrelenting demand for goods and services. . Hopefully, high-income consumers will continue to be able to clear those levels. However, businesses exposed to lower market households should proceed with caution when it comes to inventory management, as inflation may now be in the rearview mirror. In our estimation, inflation will not fall back from the 2% level that defines price stability for the next two years.
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