First Business Survey: Business optimism continues into 2019

The survey, taken this fall, found that 2018 was the fifth consecutive strong year in terms of sales revenue and profitability, and that three quarters of the respondents expect overall business performance to further improve in 2019, while only 7% expect a decline.

Despite gathering national and international economic headwinds, Greater Madison employers remain optimistic about their business prospects for 2019, according to the 16th annual First Business economic survey.

Survey results will be presented today during the annual First Business Economic Forum, and they reveal that optimistic expectations for 2018 were not only met, but they will carry into 2019. The survey, taken this fall, found that 2018 was the fifth consecutive strong year in terms of sales revenue and profitability, and that three quarters of the respondents expect overall business performance to further improve in 2019, while only 7 percent expect a decline.

The 2018 First Business Bank Economic Survey was completed by 282 respondents in three regions in Wisconsin, with 134 coming from Dane County. It was distributed electronically to business decision makers — including owners, chief executive officers, and chief financial officers — and was completed over a period of six weeks, from mid-September to early November 2018.

Dr. Moses Altsech, who conducted the annual survey, notes the overall economic picture in Dane County has been outstanding for several years now. “Things look very optimistic in the survey,” states Altsech, who serves on the faculty of the Wisconsin School of Business at the University of Wisconsin–Madison and as the president of Moses Altsech Consulting LLC. “In fact, it’s one of many years in a row where optimism is strong.”

The timing of the survey was such that most responses had come in before the mid-term election results, Altsech adds, and more recent stock market volatility could make people wonder whether 2019 optimism is premature. However, that upbeat mood is consistent “with other economic indicators around the country, so the results of the survey and the optimism is very well aligned with those,” he notes.

What just happened?

The survey focuses on the current year’s actual and next year’s predicted results in seven categories, including sales revenue, profitability, and hiring plans.

Heading into 2018, an overwhelming 99 percent of local 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.

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 survey. The percentage of companies adding new employees also marked a new historic high, as did the percentage of companies increasing wages.

Jim Hartlieb

“It was an overwhelmingly positive year from the respondents’ perspective,” says Jim Hartlieb, president of First Business Bank in Madison. “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.”

In Hartlieb’s view, the fact that revenues were up more than profitability means that employers either had to pay more for talent, pay more overtime, pay a recruiter, or pay a temp service. In any case, operating costs were up “just a shade, which muted a little bit of the profitability component,” Hartlieb states. “Having said that, you still had 53 percent that showed an increase in profitability year over year.”

Stronger business confidence was evident in higher capital expenditures, as 86 percent of companies increased or maintained their capital expenditure levels. “If we looked back to 2016 and 2017, the survey would have shown about 30 percent of the respondents were projecting an increase in capital expenditures,” Hartlieb says. “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 good

Moving 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. In addition, hiring projections mark yet another historic high, and more than three quarters project wages to 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.”

For employers, the big challenge is there’s also more of the same in terms of pressure on the labor force. 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 labor force, 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.

(Continued)

 

Based on First Business Bank’s lending, which is up $80 million in the first 11 months of 2018, local businesses have more appetite for risk, but Hartlieb believes it’s a healthier appetite. “At First Business Madison, we had our largest increase in loans in 2018 that we’ve had maybe ever, and I think it was due to our clients needing to invest in capital expenditures that would help automate a process to drive more efficiency in their business or working capital to allow them to take on more clients, which can stress cash flow a bit, but we definitely see that as a positive going forward,” Hartlieb observes. “It’s definitely a more measured risk among business owners. There is a lot more due diligence in conversations around the debt or what impact the debt will have on the cash flow of the business — the efficiencies it will drive in the business — and then ultimately the return on investment, or the payback on that investment. That’s very healthy.”

At some point, Hartlieb adds, an economic correction (i.e., recession) will come, but he feels better about it now than he did in 2007 because clients have less leverage on their balance sheets. “They’ve learned from the recession that having that much 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.”  

Problem children

As is customary, survey respondents also were asked to identify their concerns heading into the new year, and they cited several external factors that could affect business activity. They include a prolonged trade war with China, the terms of the British exit from the European Union, stock market and oil price volatility, and potential political upheaval, but neither actual business performance nor optimism for the forthcoming year appear to have been hurt by these concerns.

“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.”

Altsech notes that last year, local business leaders were asked if they planned business development initiatives to capitalize on a strong economic climate, and the top responses were diversifying their client base, creating processes for generating innovative business ideas, and creating or expanding leadership training tailored specifically to their needs. When asked this year about whether they followed through on those, client-base diversification was the top priority, while the other two were toward the bottom.

That was both encouraging and concerning to Altsech because while expanding the client base is important, the other initiatives also can help make the next downturn less painful. “It almost raised the intriguing possibility to me that maybe some of those bigger picture, strategic initiatives that can help a company at the next downturn may sometimes be falling through the cracks because you’ve got to keep up with your customers, and you’ve got to look for the talent you're missing,” he states. “There are other things you’ve got to do today that can’t seem to wait, but by not investing in the things that are going to make you stronger tomorrow, as hard as they are to balance with putting out fires today, they are important and if you neglect them, eventually it catches up with you.”

Madison swagger

Given the national headwinds, the level of local confidence could mean that Madison employers once again feel somewhat insulated from national and international events. That feeling of certitude was somewhat eroded by the Great Recession, when the local unemployment rate reached the 5 percent range, but apparently it has returned. Altsech notes, however, that Greater Madison has some company on the optimism front.

In this particular survey, the surveys for the Greater Milwaukee area and for the northeast Wisconsin area, which are the other two surveys that First Business does, were also very strongly optimistic,” Altsech notes. “In Milwaukee, the numbers were the best they’ve had in their region in many years. So, it’s an optimism that’s pervasive, but it’s important to remember that in Madison, during good times we’re doing a little bit better, and in bad times we’re doing a little bit better than everybody else. Between that, the research at the university, the resources of the state [government] being proximate, all of that contributes to greater confidence.”

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