The economic index from RSM shines a light on the middle market

ARTICLE | May 17, 2021

Authored by RSM US LLP

The American economy has been a story of transformation and growth over the decades, from agriculture to manufacturing to, now, digital technologies. Through it all, middle market businesses have been the key driver of that growth.

Today, the businesses that make up the middle market are responsible for a third of all employment in the United States, and an even greater share of gross domestic product. It’s no mystery that some of the midsize businesses of today will become the major corporations of the future.

Yet too often, these businesses receive little more than lip service from policymakers, lawmakers and the news media. Almost by definition, they are caught in the middle—too small to be big, but too big to be small.

It was this dichotomy that RSM sought to address five years ago when it launched an innovative, first-of-its-kind economic indicator called the RSM US Middle Market Business Index.

The goal was nothing less than to capture the important role of the middle market in the American economy – the real economy – and to offer a deeper understanding of its performance and prospects, said RSM’s chief executive, Joe Adams.

“We thought if we could give a voice to the middle market, it would help our clients and obviously make a contribution to the broader middle market and the many companies that operate in that segment,” Adams said. “That certainly has proven to be true.”

One of the benefits of the index, Adams added, is that it brings more transparency to an opaque part of the economy.

“Companies are generally private companies or private equity-owned in the middle market space, so they don’t publish their earnings, they don’t publish information the way public companies do,” he said. “The MMBI is really trying to develop a consistent measure of the current state and future prospects of these companies so that we can inform others on what they're thinking, how they're doing.”

The result has been a steady shift in the way that middle market businesses are perceived on Capitol Hill and among policymakers, said Joe Brusuelas, RSM’s chief economist. “Traditionally, the middle market gets overlooked when it comes to policy. Our sense is that the MMBI has changed that. We’ve talked with policymakers at the upper levels of the U.S. government who utilize it to fill information gaps about underlying conditions in the real economy and make policy.” The interest in the survey’s results cuts across party lines, Brusuelas added.

The idea

Even though the index is now 5 years old, its origins can be traced back nearly a decade, to 2012. That’s when RSM redefined its vision to be the first-choice advisor to middle market leaders globally. It wasn’t so much of a new strategy for RSM—if anything, the middle market has been in the firm’s DNA ever since it was founded almost a century ago in Cedar Rapids, Iowa, serving farmers and the Midwest economy.

But RSM saw an opportunity to bring deeper insight and knowledge to its clients and others about the broader middle market economy. For Sara Webber Laczo, RSM’s head of corporate communications, defining that vision boiled down to a simple question: How do we give voice to the middle market?

“There were resources in the marketplace, but nothing that rose to the level of what RSM was looking for,” she said. “We needed to have more knowledge, insights and information about the middle market than anyone else if we were truly going to establish the position as a first-choice advisor,” she added. “We also needed to have reach.”

The result was a two-pronged strategy: gather extensive data and information, and leverage that new knowledge in the marketplace. Webber Laczo started poring through client information with Melissa Toledo, RSM’s senior director of research and strategy, and they soon realized that they needed more information. A more ambitious approach began to take shape.

In 2014, RSM brought Brusuelas on board as chief economist, and hired The Harris Poll to conduct a survey of senior executives in middle market companies to collect the data. Moody’s Analytics was engaged to help with establishing the components of the index and to calculate the index value from the survey data.

The index

Brusuelas and the group created an economic survey that regularly asked executives 20 questions covering 10 subjects -- everything from hiring to wage rates to pricing to spending on capital expenditures. For each subject, executives are asked about their experience for the previous quarter, and then their plans for the following six months.

Sentiment is only one of the subjects addressed, said Steve Magnino, RSM’s marketing research director. This is an important distinction, he said, because the index is intended to capture the pulse of actual economic activity, and not be a gauge of mood.

About 400 executives who hold senior positions at middle market companies take part in the survey. Then the survey is broken down into two segments—the smaller end of the middle market, or companies with revenues from $10 million to $50 million a year, and the larger end, or those companies with revenues from $50 million to $1 billion a year. A similar distinction in size is made with financial services companies, but based on the firm’s assets under management.

In addition to the regular survey, every quarter RSM asks executives additional questions that are focused on an immediate concern in the business community. These have included questions about cybersecurity, digital transformation, and environmental, governance and social practices, or ESG.

The end result is a level of rigor that is unmatched in the marketplace, Magnino said. “Others have a snapshot,” he said. “We have a movie.”

The launch

By April 2015, the index was ready, and RSM conducted its first survey. Right away, the value of the data was apparent, but it was still too soon to launch the index to the public. For the index to have credibility—a central goal—it required more data, more research and more time.

During that time, RSM had a fortuitous meeting: At a Wall Street Journal conference in June 2015, Webber Laczo discussed the index with officials from the U.S. Chamber of Commerce, and that eventually led to an important partnership between RSM and the Chamber.

Neil Bradley, executive vice president of the U.S. Chamber, recalled welcoming the chance to partner with RSM. “The idea that we could get insights into this huge segment of American employers, understand the challenges that they face and the opportunities, it was just a natural fit for us at the U.S. Chamber,” he said. “The benefits have been manifold.”

The impact

By the end of 2017, as the index approached its second year of publication, it started to gain attention in the national financial media. At the same time, Brusuelas and Webber Laczo were connecting with the policymaking and business communities to spread the word. It took time, but Webber Laczo was patient—and confident. “With anything new, people need to give it some time to see if it’s a real thing, to see if there is anything there.”

The key components, she said, were consistency and reach. That meant it needed to have a regular publishing schedule, and distribution among lawmakers, policymakers, the news media and executives. The U.S. Chamber of Commerce played a critical role in expanding the MMBI’s reach.

Fast-forward to this year, and Brusuelas is a regular presence on national media outlets. He is frequently sought out by policymakers and lawmakers who drive decisions that affect the middle market.

The insights

One big reason for MMBI’s success is the fresh, sometimes unexpected results it comes back with. For example, one of the early surveys asked executives about their views on the Affordable Care Act. The results from the survey showed that middle market businesses either supported the Affordable Care Act or were already offering health care that was in compliance with the employer mandate, contrary to the assertions of some lawmakers. That message proved to be of great interest on Capitol Hill. “We took that information and shared it around Washington,” Webber Laczo said. “People immediately wanted to see the results from our research.”

Another interesting survey result involved executives’ views of Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate to 21%. Middle market businesses told RSM that they primarily planned to return the savings to shareholders and investors, and were not as focused on increasing capital expenditures to invest in their operations. It was a counterintuitive take, but one of enormous value in gaining insight into the priorities of middle market businesses.

A leading indicator

An important aspect of the survey data, Brusuelas said, is the forward-looking picture that it provides. But the survey’s true value would become clear only in a time of crisis, he said. And the pandemic provided that test.

MMBI proved to be prescient. Bradley, of the U.S. Chamber, said that when the economy was shutting down in the spring of 2020, MMBI foresaw the severity, and the shape, of the downturn.

“The middle market was one of the earliest indicators that we saw on how we were going to have this bifurcation in the economy,” he said. Of particular value, he added, was the insight that “some businesses were going to be able to come back really quickly, depending on the industry that they were in, and others were going to continue to suffer.”

A year later, with economies opening back up and vaccines being distributed, MMBI is similarly prescient, with data pointing to the robust expansion.

In the end, Brusuelas said, MMBI has become known as a tool to predict economic activity. “MMBI is a leading indicator,” he said. “It really gives a sense of what businesses are expecting, and what they are going to do.”