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How long can growth last?

A trio of economic and business leaders predicts more economic growth in 2019, but national headwinds threaten the good times.

First Business Bank President Jim Hartlieb says 2019 is shaping up to be another strong year for the Dane County economy.

First Business Bank President Jim Hartlieb says 2019 is shaping up to be another strong year for the Dane County economy.

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From the pages of In Business magazine.

Last year at this time, there was near unanimous agreement that 2018 would be a strong economic year locally, statewide, and nationally, and that’s exactly how things unfolded.

Globally, just about every western economy was growing, the U.S. economy was showing signs of renewed life with the stimulus of tax rate cuts on the way, Wisconsin was approaching record low unemployment with the Foxconn development posing challenges for future workforce development, and Greater Madison was enjoying the fruits of strong growth with the distinction of being the only south-central Wisconsin county that was gaining in population.

As the year progressed, however, more headwinds have developed that now paint a less rosy picture nationally. A temporary truce in the trade war with China offered a bit of a hope, but rising interest rates have the White House worried, a jittery stock market led to some recessionary forecasts, and a continuing labor shortage all have economists wondering how much longer 3-to-4 percent growth can continue.

Meanwhile, local and state economic prospects are still excellent. In this look at the economic forecast for 2019, we spoke to Jim Hartlieb, president of First Business Bank in Madison; Kurt Bauer, president and CEO of Wisconsin Manufacturers & Commerce; and Elliot Eisenberg, an economist, lobbyist, and humorist with GraphsandLaughs.

Local picture: Madison businesses remain optimistic

When local numbers are crunched, it’s hard to think of the economic performance of Greater Madison’s economy as anything but spectacular. The 16th annual First Business economic survey, released last month, not only found that 2018 was the fifth consecutive strong year in terms of sales revenue and profitability, responding businesses are highly optimistic about 2019, as well. Three quarters of them expect overall business performance to further improve in 2019, while only 7 percent expect a decline.

Heading into 2018, Dane County employers were extremely optimistic about the local economy. An overwhelming 99 percent of companies expected improved or unchanged performance, including 79 percent that anticipated improvement. Moreover, just 1 percent of respondents expected a worse overall business performance in 2018 than they had in 2017.

What actually happened? Sales revenue for 2018 tied the historic high from 2014, and profitability was very strong, making 2018 one of the best years in the history of the First Business survey. The percentage of companies adding new employees also marked a new historic high, as did the percentage of companies increasing wages.

“It was an overwhelmingly positive year from the respondents’ perspective,” notes Hartlieb. “We had 75 percent of the respondents report an increase in sales revenue, which was on top of a great year in 2017. In terms of profitability for 2018, 53 percent saw an increase in profitability, which highlights the picture that I see forming here. The demand is there, the business is there, but the biggest challenge that companies are having is finding the labor and the skills to basically produce or execute the service to generate the revenue.”

Stronger business confidence was evident in higher capital expenditures, as 86 percent of companies increased or maintained their capital expenditure levels. “Another thing that struck me was the increase in capital expenditures year over year,” Hartlieb states. “If I looked back to 2016 and 2017, the survey would have shown about 30 percent of the respondents were projecting an increase in capital expenditures. What actually happened in 2018 was that 47 percent, almost half the people, reported an increase, and 39 percent reported the same level, so between the two you had 86 percent of the companies either meet or exceed their level of capital expenditures from the year before, which tells me they are bullish about the future and they are investing in capital expenditures to prove that.”

Looking ahead to 2019, the percentage of companies that project increased sales is slightly higher and, despite a slight decrease in the percentage projecting an increase in profits, profitability projections remain strong. Forty-one percent expect an increase in projected capital expenditures in 2019 (up three points), and the percentage of those who expect capital expenditures to decrease in 2019 is unchanged at 9 percent, a single point above the historic low. Hiring projections mark yet another historic high, and more than three quarters project wages to further increase in 2019.

“We’ve got an even higher number of companies expecting 2019 to be better than 2018,” Hartlieb notes. “Seventy-eight percent expect an increase in revenues, and 15 percent no change, so you’ve got 93 percent of the responding companies thinking it’s going to be at or above, and again that’s coming off of a record year in 2017 and 2016 was very good, as well.

“Profitability-wise, it’s similar to 2018, as about 55 percent expect an improvement in profitability, so it’s slightly higher but not to the same level as the revenue category.”

About 80 percent of companies are expecting an increase in wages, and 60 percent are projecting an increased number of employees. “So again, it’s that pressure on the labor force to be able to meet the demands of their customers that’s going to be a big story that plays out in 2019 and beyond,” says Hartlieb.

Survey respondents were asked to identify their concerns heading into the new year, and they cited labor, tariffs, interest rates, and immigration policy. “I would say generally, it’s uncertainty,” Hartlieb notes. “The tariffs, the trade situation, interest rates, immigration policy and how that might impact labor — all of these things have uncertainty. Business owners, if they know the rules of the game, will win the game. It just seems there may be a higher level of uncertainty as we head into 2019 that might cause some disruption as we go along, and it will force business owners to act on their feet even more so than in the past.”

At some point, Hartlieb adds, there will be a correction that causes the economy to slow down, but employers are better positioned to weather the storm than they were in 2007 because they have less leverage on their balance sheets. “They’ve learned from the recession that having that leverage is going to be harder when there is a correction,” he notes. “They’ve got more engaged employees, they have more automation in their manufacturing processes, and it’s just a much healthier situation in that they will be able to react when and if we do have another correction.”

(Continued)

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