It’s a bit early to sing Happy Days Are Here Again, but most key industry sectors expect another strong economic year.
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Finance: Where’s the appetite for risk?
There’s nothing like a Great Recession to serve as an appetite suppressant, especially when it comes to the willingness to assume risk. While Wisconsin banks and credit unions report steady loan growth, the national picture is somewhat puzzling.
Loan growth at banks has slowed to it lowest level since the fourth quarter of 2013, according to third quarter 2017 data from the Federal Deposit Insurance Corp. It marked the sixth straight quarter of decline in this measure, as growth in each of the four major lending categories declined, including business lending.
Locally, while there was an uptick in 2017, the comparative lack of interest in ramping up business borrowing was a topic of discussion last month at the annual First Business Economic Forum. Given their experience during the Great Recession, local businesses still favor using higher profits to shed debt, or “deleverage,” which is “a predictable situation” given what they experienced during the recession, notes Jim Hartlieb, senior vice president of First Business Bank.
Third quarter 2017 data shows that in Wisconsin, overall bank lending increased 5%, including 3.5% in commercial and industrial loans and 10.8% in farm loans. “In Wisconsin, we have seen steady growth over past few years, including 2017,” notes Rose Oswald Poels, president/CEO of the Wisconsin Bankers Association. “By that, I mean we haven’t seen huge peaks or large jumps in lending.”
Given the high level of nonperforming loans that contributed to the financial crisis of 2008–09, perhaps the best news is that such “toxic debt” is declining. Among banks, noncurrent loans and leases fell by 18.6% in the third quarter, and Wisconsin credit unions not only reported double-digit lending growth in the first nine months of 2017, they also enjoyed a lower delinquent loan ratio of 0.67%.
“People are paying with greater regularity and on time, and that’s a great indicator of what may lie ahead for us in 2018,” states Brett Thompson, president and CEO of the Wisconsin Credit Union League.
The outlook is even brighter for angel and venture capital, as Wisconsin already is beginning to see more deals and dollars invested. The Wisconsin Technology Council’s 2017 “Wisconsin Portfolio” report, which tracked 2016 activity, recorded $276 million in 137 individual deals. The average value of each deal went from $1.5 million the previous year to $2 million.
Notes Tom Still, president of the Wisconsin Technology Council: “It shows an increasing awareness of Wisconsin.”
The Dow Jones milestone mania has stock market “bulls” proclaiming that a 30,000-point Dow is well within reach, but while optimism is in long supply, is there anything that could derail the good times that appear to be ahead?
Given the economy is highly influenced by consumer confidence, geopolitical events could puncture that confidence, and possible military action against North Korea is the most oft-cited trigger. It’s no coincidence that two of the stock market’s worse days of 2017 came after President Trump promised to rain fire and destruction on the so-called “Hermit Kingdom,” which has been provocatively testing ballistic missiles with greater and greater range. After the latest North Korean missile test, President Trump’s national security advisor H.R. McMaster said the potential for war with North Korea “increases every day.”
While some point out that such a scenario is in neither country’s best interests, the president’s rhetoric has people worried. “We all saw what happens when a 9-11 occurs,” recalls Jay Loewi, CEO of the QTI Group. “The world has a tendency to stop and you take a hard right or a hard left, but at this point, without something like that happening, I see fairly strong economic times ahead for the next year or two.”
Corey Chambas, president/CEO of First Business Bank, notes that dramatic global events can shake people’s confidence and cause a ripple effect. “Consumer confidence has been great lately, but if consumer confidence goes down because the stock market is down, consumers stop spending as much and businesses become less optimistic,” he states, “and so I do think you could see something from outside our borders that could quickly change the economic outlook.”
First Business survey: Is optimism justified?
Historic highs and lows dot this year’s First Business Economic survey results, and while the term high-low might suggest fluctuation, they’re all on the positive side of the ledger as local business leaders feel the optimism heading into 2018.
The annual survey, conducted over the fall and presented in December, tracks actual 2017 and projected 2018 performance in several categories. Overall, it shows that 99% of companies expect improved or unchanged performance in 2018, with 79% anticipating improvement.
Whether their optimism is based on solid economic data, “irrational exuberance,” or a combination of both, there are several historic landmarks in the 15-year-old survey.
- Fifty-three percent project hiring increases, a new historic high. Finding employees to hire will be the challenge.
- More than three quarters of businesses (78%) reported higher wages in 2017, beating the previous high in 2006, and only 2% of respondents expect a decrease in their projected number of employees for 2018, a historic low.
- A new historic low of 3% expect a decrease in 2018 projected sales.
- The low percentage of companies that actually decreased capital expenditures (8%) marked a new historic low, and more than nine out of 10 companies increased or maintained their capital expenditure levels in 2017.
For Dr. Moses Altsech, a faculty member at UW–Madison and president of Altsech Consulting, which conducted the survey, the optimism of local businesses is based on strong data and fundamentals. “If you look at the numbers, they really do look very solid — strong corporate earnings, low unemployment, and a lot of really positive economic indicators,” Altsech says. “If it wasn’t for those, one could say it’s wishful thinking or irrational exuberance.”
Corey Chambas, president/CEO of First Business Bank, thinks there is a bit of solid foundation and irrational exuberance. “Right after Trump was elected, everybody was really optimistic on the business side, but nothing happened,” he states. “Now, maybe there is something that has real economic impact that’s coming with the tax cuts, so there is a little bit of reality to it.”
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