First Business survey panel sees rays of hope through economic fog

QTI Group owner Jay Loewi kicked off the panel discussion at the 2012 First Business Economic Forum with a sly analogy summing up the business community’s prevailing sentiment as it looks ahead to 2013.

“I was saying to someone the other day, it’s almost like a snow globe,” said Loewi at the Dec. 5 forum at Monona Terrace in Madison. “Something gets it going, and when it starts settling down, someone bumps it again. So it gets a little bit unclear what you’re seeing, and I think it is hard to look out to 2013, with health care reform and other things that are tumultuous at this point in time.”

As survey presenter Scott Converse said in an interview with IB following the forum, if there’s an overriding theme of this year’s First Business Economic Survey, it’s that businesses are having an increasingly difficult time predicting what the economic landscape will look like in the coming year:

“In the past, when businesses said, ‘we’re going to perform well’ – and that’s what we see in this survey, 75% of firms expect better performance – in the past, when we would look at the future economic indicators, some of those key indicators would see increases. ‘I’m going to perform better because profitability is going to go up’ or ‘I’m going to have increased sales revenue, or [operating] costs are going to go down’ – any one of those leading indicators, you’d see changes to support the increased optimism about performance. This year, while there is an expectation that they’re going to do well, they are very uncertain about those indicators.”

The best news coming out of this year’s survey was that businesses saw statistically significant increases in overall performance and profit in 2012, and revenue trended up in the retail, service, and manufacturing sectors. At the same time, business leaders are not so emboldened by this year’s performance or encouraged by the coming year’s prospects that they’re ready to say the economy is finally on the launch pad and set to sail to the moon. (See “First Business Bank survey: 2012 more profitable, 2013 uncertain” for a detailed analysis of the survey numbers.)

In presenting the survey findings, Converse noted that employment increases are still far below pre-recession levels, as are wage increases. In addition, among those companies that reported low performance, rising gas prices and higher operating costs were cited as reasons for slow growth far more frequently than in 2011.

A bit more upbeat

Still, even with all that uncertainty in the air, the First Business Economic Forum panel sounded a general note of optimism – with just enough caveats thrown into the mix to keep attendees guessing.

This year’s panel consisted of Converse, the director of technology programs for the UW-Madison School of Business; Beth Prochaska, executive vice president of Potter Lawson, Inc.; Loewi; First Business’ Mark Meloy; Mike Victorson, president and CEO of M3 Insurance; and Mark Taber, president and CEO of Wind River Financial. The discussion was moderated by Wendy Warren Grapentine, owner of Straight to the Point Communications.

Asked for their first impressions of the survey, some of the panelists noted that there’s plenty of reason to be optimistic, even if media speculation and analysis continue to be lagging indicators.

“I think the interesting part for me is how 75% of people felt good about 2013, but all the uncertainty that came through,” said Taber. “The businesses that we’re talking to feel pretty positive about next year, whether it’s hiring, whether it’s sales growth, whether it’s being able to increase prices. We’ve seen in the last, let’s say three months, a lot of our customers investing in new technology. Bigger customers are updating their systems, looking for efficiencies internally, and we’re part of that process as well. And so I think everybody’s really gearing up – no matter what you’re reading in the newspapers or what you’re seeing on TV – for a pretty positive 2013.”

Of course, if there’s been a sour note in the U.S. economy as a whole – at least from an employee perspective – it’s that wages and employment aren’t keeping up with the overall growth of businesses. That same phenomenon appears to be playing out on a local level as well.

“We’re three years into a recovery, albeit a mild one, and people don’t recognize it because of either political turmoil or persistent unemployment, and I think the numbers bear that out,” said Victorson. “When you think about how many businesses reported increased profitability, and then how many also experienced either neutral to more revenue gain, so many people, though, are not increasing wages, and it’s a concern for me, and also I think a unique challenge for our businesses. … So it’s a little surprising that that wage group didn’t happen, because that’s different than adding employees. It’s cheaper to increase wages than add new head count, and yet that wasn’t continuing at a pre-recessionary level.”

The survey also suggested that Dane County appears to be following yet another nationwide trend: Companies are keeping cash on their balance sheets rather than looking for ways to spend it.

“The thing that I found most interesting was how people responded to the capital expenditures part of the [questionnaire],” said Meloy. “Because that is something that I have seen consistently for the past couple of years, where companies are maintaining cap ex but not increasing cap ex, and you see that in many clients … that revenues are up, profits are up, and cash is up on their balance sheet. They’re very cautious in how they are looking at what they’re going to do for next year. I think that’s changing a little bit. I do think there is some gathering momentum or confidence that’s going on. I think we saw that in the responses in the summary information we saw this morning, but I think we still have a ways to go.”

While that caution may be a natural human reaction to the Great Recession, according to Taber, it also points to a broader strategy.

“Bankers are requiring more cash, and if you’re borrowing today, you have to have cash on your balance sheet,” he said. “So the mentality of business owners is, how do I retain more and hold more? Not only because I want to grow my business – I know I’ll need that capital – but also when this economy really picks up, smart business owners today want to be able to have the capital available in their war chest to jump on the market, because there’s going to be a lot of opportunities.”

Still, not everyone is waiting for a flashing green light before stepping on the accelerator. Prochaska, whose company offers architecture, interior design, cost estimating, and construction administration services, says staying ahead of the curve with respect to wages can offer a competitive advantage.

“In our business, we may be the anomaly, but we have done wage increases,” said Prochaska. “We have made a lot of capital expenditures on technology so we can do more with less, and it’s really paying off.”

And while fiscal caution can position a business for a strong rebound, there is a potential downside, says Loewi:

“You do have some firms that are increasing wages fairly substantially, but you still have a couple firms that are at zero, and I think if you are still at zero, you’re going to be at risk of losing some of your employees at this point in time.”

Health care conundrums

While employment decisions and the overall health of the economy are certainly weighing on business owners’ minds, as 2013 approaches, nothing is higher on the agenda than what to do in response to provisions in the Affordable Care Act.

“[The ACA] is on every single business owner’s mind that we insure,” said Victorson. “And every single businessperson that we have, whether they have five employees or 500 employees, they are going through the process of trying to do the math and live through the uncertainties that are buried in our legislation and are yet to be worked [out] – because there is a significant level of cost, whether people are staying in the business of providing health insurance or exiting.”

And although many provisions of the ACA have been looming for more than two years, according to Loewi, there’s still a lot of confusion about what’s in the law and what decisions individual business owners should be making – and this is contributing to the climate of uncertainty as well.

“Some companies might not provide health insurance, they’ll go into an exchange but they’ll make the right moves in their organization and their employees will feel satisfied and stay,” said Loewi. “So again, it’s the snow globe effect. Everything is getting thrown up in the air. And really what surprises me from a business perspective is the amount of misinformation that’s out there now, because it’s so complicated and people are having a hard time getting their arms around it.”

Still, even with the degree of uncertainty that surrounds the ACA and the economy as a whole, there appear to be enough positive signs to at least hint at a renaissance.

“All of the uncertainty is, the way I see it, around labor and labor costs,” said Victorson. “That can’t envelope us as business owners and leaders into this paralyzed thinking that the economy stinks, we’re still in a recession, I can’t invest in my company to grow it. All those principles that you know about your company and your market, the people that you’re talking to, all those things are continuing to point in the right direction. The uncertainty as I see it moving forward is really highly contained in the labor cost area, and I would throw health care reform in, and I would throw anything that happens with the fiscal cliff in that.

“Clearly, if some government spending is cut … that could have an impact on some of our industries, but too many things are positive for us to unplug our brains and not think about how we invest to grow our businesses. This is actually a better time, much better time, than the end of 2008, 2009, first part of 2010. Let’s go for it.”

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