As overall economic sentiment holds steady, the middle market is shifting focus to rising prices as the economy reflates amid still-constrained supply chains, according to RSM US’ Middle Market Business Index (MMBI).
Typically a quarterly index, the firm is releasing monthly installments of the MMBI for the duration of the Covid-19 pandemic. February’s data revealed that the MMBI composite score remained stout, down only modestly from 123.8 in January to 120.5.
The firm said that while executives’ views on the economy, earnings, revenues, hiring and compensation have not materially changed over the past month, the results demonstrate a growing conversation around rising prices in the middle market.
The February MMBI data revealed that while 58% of executives surveyed noted that they faced higher prices paid for goods – which was down from 66% in January – only 17% reported a decline in prices.
However, on the question of forward-looking prices paid, 69% said they expect to pay higher prices, 10% expect lower prices and the remainder expect no change. Additionally, only 38% respondents said that they received higher prices for goods or services, 23% said those prices had decreased and 39% noted there was no change.
Some 59% of respondents stated that they intend to try to pass along price increases over the next six months, and 31% said they expect not to pass along those increases; 9% said they expect to cut prices, which will likely be absorbed by thinner margins.
The February MMBI also included notable findings on hiring, compensation and capital expenditures. It added it is important to note that the U.S. economy and the middle market are comprised of a significant number of firms that provide services, which means that inflation is primarily a function of wage pressures.
Currently, only 32% of firms reported an increase in compensation, 21% noted a cut and 45% stated that wages and salaries remained unchanged. While 56% noted they would increase compensation over the next six months.
In terms of capital expenditures, it found only 29% of executives increased investment on software, equipment and intellectual property in February, and 47% intend to do so over the next six months.
RSM chief economist Joe Brusuelas, said: “This month’s reading indicates that middle market firms are skeptical of their ability to pass along price increases, and while a majority intend to try, the reopening of the global economy and what we expect to be a hypercompetitive post-pandemic economy, will create challenges.
“However, it’s important to note that this data does not point to an immediate and permanent increase in the price level across the economy. Rather, it points to a temporary disruption in supply chains, and a transitory increase in inflation caused by the first few months of the pandemic.”
He added: “The immediate focus in the middle market should be on increasing efficiencies and engaging in productivity-enhancing investments to address supply chain constraints as they wait for prices to return to pre-pandemic equilibria.”