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Earlier this month, we learned that Fortune 500 companies are increasingly concerned about trade tensions and tariffs. We also saw evidence that small manufacturers are losing confidence, with lower revenue expectations and reduced hiring plans. And now, it seems this concern is spreading to middle-sized companies.
According to this quarter’s RSM US Middle Market Business Index (MMBI) 40% of middle market leaders reported that tariffs on imported goods are posing challenges for their businesses and 26% cited a negative impact from retaliatory export tariffs. Overall, the MMBI dropped to 129.4 in Q3, down from the 132.3 last quarter.
Here’s more from the report…and it’s not pretty:
It is important to note that the third-quarter MMBI survey was conducted prior to the most recent escalation of the trade war between the United States and China, the resulting impact on the global supply chain and the ensuing tightening of financial conditions reflected in declining stock prices, an inversion of the yield curve and a widening of credit spreads in the bond market. These developments may cause further deterioration of middle market business sentiment in coming quarters.
That’s right, it could already be worse. We might just not realize it yet. All this trade uncertainty can lead to real action by business decision-makers. Looming tariffs can quickly translate into less investment, less hiring, and less growth. Something the MMBI elegantly calls “an uncertainty tax.”
The heightened level of concern around the economy’s direction is most noticeable in the relatively low number of middle market executives who indicated they expect to boost capital outlays on fixed business investment—a telltale sign of the heightened “uncertainly tax” resulting from instability in the macroeconomic environment.
So, what’s to be done? Hopefully, not ratcheting up the rhetoric or the bluster or tariffs themselves. What’s called for is cooler heads, more talking—and removing trade barriers to increase certainty for businesses of all sizes. That means first and foremost removing recently-imposed tariffs with China and any similar planned tariffs. And it also means passing a trade agreement between the U.S., Canada and Mexico that could help American manufacturers, farmers and ranchers sell more to some of our most important trading partners.
As Neil Bradley, U.S. Chamber of Commerce executive vice president and chief policy officer, puts it:
“Rising tariffs and policy uncertainty are preventing midsize businesses – who employ millions of Americans – from investing and growing. To guard against a possible recession, policymakers need to restore economic certainty, and that means deescalating trade tensions with China, passing USMCA and investing in the future through an infrastructure package.”
It’s not too late, but time is of the essence. The tariffs could cost every American household between $600-$1,000 by the end of the year. Already, consumer sentiment is down and over a third (38%) of survey respondents to a recent University of Michigan poll made “spontaneous references” to the negative impacts of tariffs. Consumer resilience has been one of the most durable characteristics of the recent expansion, and these warning signs should be taken seriously.
The good news is that early next month trade negotiators are scheduled to meet for “high-level talks” on the U.S./China tariffs. Let’s hope they got the message from consumers and businesses that tariffs are not the way to go. And that they decide to give the economy a sudden boost by removing these unnecessary and burdensome tariffs. And let’s also hope legislators on Capitol Hill do their part, find some middle ground and pass USMCA.
If they do, we all stand to win.