First Business Survey: Local companies remain upbeat

It’s the most wonderful time of the year when the results of the annual First Business Economic Survey provide an indication of whether local business performance was naughty or nice, and this year’s findings demonstrate that most organizations have been on their best operational behavior.

At this time in 2014, the survey suggested that local business optimism had returned to pre-recession levels. One year later, First Business Financial Services has once again taken the local business pulse and local operators remain optimistic about Dane County’s business future.

Dr. Moses Altsech, president of Altsech Consulting, which conducted this year’s survey, notes that Dane County businesses expected 2015 to be a very good year and they were not disappointed. Looking ahead to 2016, he says it’s evident from First Business surveys in Dane County, Milwaukee, and other areas of the state that employers throughout Wisconsin remain optimistic, although slightly less so than last year.

“Business people are still very positive about the economy in Dane County and other regions of the state, as well,” he states. “That makes a difference, too, so there is nothing that we look at when it comes to the report that makes us say, ‘Oh oh, we should be worried about something.’ It’s just not in the data.”

Like its predecessors, the 13th annual survey focuses on the current year’s actual results and next year’s predicted outcomes in several categories: sales revenue, total operating costs, capital expenditures, profitability, number of employees, changes in wages, and changes in pricing. The purpose of the annual survey is to help area business owners gain a broad-based understanding of the local business climate, including information that can be used to plan for the coming year.

Overall, the outlook for 2016 is very positive, but it is not at the record-breaking levels recorded the previous year. Seventy-one percent of respondents indicated that 2015 either lived up to expectations or was better than expected in terms of overall performance, and 78% expect their businesses to perform better in 2016 despite some spotty economic news during the period in which the survey was conducted — between late August and mid October of 2015.

For example, 65% of respondents experienced a sales increase in 2015; while strong, that performance did not match the anticipation coming into the year. In last year’s survey, a historic high of 75% of respondents predicted an increase in sales in 2015. However, the percentage of respondents who saw an actual decrease in sales was just 17%, a new historic low. For 2016, 80% expect another sales increase, down slightly from last year’s historic high of 82%, while only 5% forecast a decrease in sales, a historic low.

Historic lows are anticipated on the negative side of several categories, which is one of the reasons the survey results portend good things for 2016. For example, in the category of overall business performance projections for 2016, only 4% of Dane County businesses project a worse performance in 2016 than they had this year.

“The tendency when you look at the report is to look at how many people project more positive results for the future, but it’s also good to look at the flip side to see how many people project negative results,” Altsech says. “So when it comes to sales, for instance, a record low percentage of businesses project a sales decrease for 2016 and a record low projects a reduction in profitability in 2016.”

Mark Meloy, CEO of First Business Bank

Mark Meloy, CEO of First Business Bank, cited strength in indicators such as hiring and wage growth, which are a positive sign for business owners and employees alike. A strong 44% of respondents — tying the previous year’s historic high — increased the actual number of employees in 2015 and a historic high of 48% expect to increase their workforce in 2016. Only 6% project a decrease staff, which is one of the aforementioned historic lows.

In addition, 71% of respondents say actual wages increased in 2015 (84% projected a increase), and a new historic low of 1% reported a decrease in actual wages. For 2016, 69% forecast wage increases.

“At this point in time, results are positive and maybe cautiously optimistic relative to last year’s survey,” Meloy says. “Last year we saw higher percentages in terms of both the actual performance during the year and anticipated performance in the coming year, but we still see a very positive percentage of survey participants talking about higher sales this year and the anticipation of higher sales next year.

“The percentages aren’t quite as robust but still very positive when you look at it over the 13-year history of the survey.”

The lack of wage growth has been a problem in the national economy, but Meloy says Dane County’s low unemployment rate (2.6%) is one of the factors in broader wage growth here. He also says wage increases are a win-win scenario both for the people responsible bottom-line performance and for workers.

“Someone can take the cynical view and say, ‘Well, it’s going to cost the company more money,’ but employers generally don’t do it if they don’t anticipate other things expanding, too.”



Worry lines

There are some signs of concern in the survey, especially continuing flatness in capital expenditures. In 2015, 37% of respondents reported an increase in actual capital expenditures, a decrease from the previous year. However, those reporting a decrease were at a historic low 10%. Looking ahead, 33% see an increase in capital spending next year, while another historic low of 8% foresee a decrease.

In a related category, just over half the respondents (51%) reported using more than 90% of operating capacity while 39% utilized between 70%  and 90% of operating capacity, and 10% used less than 70%.

There remains hope that year-end tax legislation related to bonus depreciation and 179 expensing can come to the rescue, but Meloy notes that a more cautious approach to capital expenditures is not unique to this year.

“It’s a characteristic of business owners coming out of the Great Recession — that caution of really making sure that capital expenditures are those they really need to have, not want to have,” Meloy says. “What I’ve always said is that as we get closer to companies truly operating at capacity or near capacity, and we’re seeing some of that information in the survey, that ultimately leads to more capital expenditure reinvestment.”

Another disappointment from the survey is that while most respondents still run profitable businesses, the degree of profitability took a hit in 2015. Fifty-four percent of respondents saw an increase in actual profitability in 2015, down from 62%, the previous year’s historic high. While 67% anticipate an increase in profitability next year, a slight decrease from the previous year, only 6% expect a decrease in profitability — yet another historic low.

Part and parcel to profitability is the percentage of respondents who saw an actual increase in total operating cost as a percentage of revenue. In 2015, this metric was at a historic low of 38%.

Wallowing in Washington

If there is anything that keeps business people up at night, it’s the perception of dysfunction in Washington — both Congress and the executive branch — and the lack of a strategic approach to solving problems.

Meloy acknowledges that this is anecdotal feedback from business owners, not part of the survey results, but their dismay pertains to Washington’s inability to “find any common and agreeable plan beyond the spending bills that get done,” Meloy says. “To seemingly be operating without some kind of strategy that goes beyond the next expiration of spending bills is very unsettling. No business would operate that way.”

One way they might operate is to make futuristic investments now that the recession’s financial squeeze is in the rear view mirror; part of the motivation would be to prepare for another rainy day. “Now that those pressures don’t exist, the smart businesses are taking this opportunity to invest in their business and make it stronger and better for their employees and customers alike,” Altsech says. “The next economic downturn is coming. I don’t know when it’s coming but it’s coming. There is no such thing as continuous improvement in the economy. It goes in cycles.”

Click here to sign up for the free IB ezine – your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.