Madison business optimism continues to grow

Feature First Business Bank Economic Survey Panel

The farther the pandemic gets in the rearview mirror of Madison business operators, the more optimistic they become, and while it’s true that objects in your mirror might be closer than they appear, the contrast between this year and last year at this time is stark, according to the 19th annual economic trends survey taken by First Business Bank.

There is still plenty for local business operators to worry about — worsening labor shortages, higher inflation, and material shortages caused by global supply chain bottlenecks — but an overwhelming 92% of Dane County businesses expect the same or better performance in 2022 than they had in 2021, a year where most exceeded their own expectations.

“Looking ahead to 2022, the optimism, the number of folks who expected things to be as good or better, was north of 90%,” notes Jim Hartlieb, president of First Business Bank. “So, despite still being in this pandemic, there is a lot of optimism among business owners.

“Looking back at 2021, it just confirms the same issues we’ve heard from our clients, which is staffing, inflation, and supply chain,” he adds. “Those three topics come up in pretty much every conversation we have in terms of how to strategically address those.”

Better than expected

Jim Hartlieb Headshot

Jim Hartlieb

Taken at the end of a year marked by pandemic-related recovery efforts, 305 business leaders in greater Dane County, Southeast Wisconsin, Northeast Wisconsin, and the Kansas City metro responded to the survey. Across all markets, 46% of survey respondents reported better-than-projected results in 2021, and 20% said their businesses performed worse than projected in 2021.

In Dane County, 46% of companies also reported that their overall business performance exceeded expectations in 2021 (compared to 33% the previous year), and just 17% fell short of expectations — a sharp decline from 47% in 2020.

The survey was conducted by Dr. Moses Altsech, who teaches in the marketing department at the UW–Madison Wisconsin School of Business and is the president of Moses Altsech Consulting LLC. If you think about when the survey is conducted, which is September and October, he notes there was much more uncertainty in the autumn of 2020. The presidential election was unfolding, there was no approved COVID-19 vaccine, and “people were kind of lost in space,” Altsech states.

5x7 Moses Altsech Headshot 3

Moses Altsech

Even after the election, the result was challenged, and people weren’t sure what was going to happen with the economy. Will there be another lockdown? Will the vaccines be effective? Given the environment, Madison business operators were more optimistic than they had a right to be.

“Now, fast forward a year later, when people are filling out this year’s survey, they have seen the vaccines come out and get distributed,” Altsech notes. “At least there was already talk of effective medication being produced or being tested. The political situation had settled down, and there was less uncertainty in terms of that, and we saw that at its worst, the pandemic did not cause the world to end. That perspective provides a more sobering frame of mind for business leaders to look ahead and say where are we going?”

In 2021, they saw a real rebound — not a marginal rebound — but a real rebound in terms of sales and profits, Altsech notes. After laying off or firing people in 2020, they hired to the extent they could, and instead of wages being cut to avoid layoffs as they were in 2020, wages went up in 2021 and they will continue to rise in 2022. Here is a look at key survey metrics from 2021:

Sales and profitability

In 2021, after three consecutive years of declining sales revenue, Dane County executives reported a sharp year-over-year increase from 32% to 63% — the best figures since 2018. The number of companies reporting a decline in sales revenue also dropped precipitously, from 56% to 24%.

The profitability trend mirrored the sales trend, as the number of companies whose profits increased shot up to 51%, which compares favorably to the 28% of those whose profits slumped in 2020. However, the degree of profitability remains a question due to growing cost pressures.

Hiring and wages

The talent shortage was the top issue affecting business leaders in greater Dane County, followed by employees working remotely — the only carryover from 2020 — and a supply shortage. Nevertheless, 42% of survey respondents increased their workforce and 74% increased wages, a significant jump from 2020. Only 20% of Dane County respondents saw a decrease in the number of employees and just 5% reported a decrease in wages.

Great expectations

For 2022, workforce considerations also are top of mind, as finding new talent is expected to be the greatest business challenge, followed closely by the continued impact of the pandemic. So, local business operators listed increasing the number of employees in their businesses is the top priority for 2022, followed by client base diversification and cross-training employees.

Even with these workforce challenges, 67% expect better overall business performance, 25% expect to perform the same as this year, while only 8% expect to do worse, reflecting a greater optimism than was reported last year. What’s more, 63% of survey respondents anticipate hiring more, 77% project wage increases, 75% expect higher sales, and just over half project higher profits but only marginally higher.

“They don’t look at the world and say, ‘Oh, it’s all fun and games from here on, and this is over,’ but they certainly see that gradually things have improved,” Altsech notes. “They see no reason why they should not continue to improve.”

Reasons for resilience

Local business operators attributed their better-than-expected performance to improved internal efficiencies, the continuing benefits of Paycheck Protection Program loans, ramped up sales and marketing efforts, investments in new talent, and higher prices. The latter, made possible by inflation and competition for labor, might reach a point of diminishing returns.

This is the first time since Altsech has been involved in the First Business survey that high inflation has been a factor. Simply put, it’s never been on the radar before, and while it can be positive in the short run, it could turn negative in the long run. “It’s interesting because higher prices are one of the things that really helped companies hold their own in 2021,” Altsech notes. “People increased prices because the cost of everything went up, but that’s really helped their bottom line too.”

Conversely, inflation also means your costs are going up, which hasn’t been lost on consumers, and so it might not be a benefit for long. “You go to the supermarket, or you go to UPS and see what they charge to ship something, and it’s through the roof,” Altsech states. “So, that’s a concern for businesses because you’ve got to wonder how much of that you’ve got to absorb, which means you’re eating into your bottom line, and how much of that you pass onto the consumers, or the clients, depending on whether your business to business or business to consumer.

“But you wonder where their tolerance ends,” he adds, “and they figure that given this price point, I’m going to buy 20% less.”

The same dynamic applies to anticipated profits. The sales projections of Dane County business operators are much higher than their net income projections because the cost of labor and raw materials “have skyrocketed,” Altsech notes. “They still see a profit increase, but they see a more modest profit increase than they see a sales increase because of those cost pressures and because they also expect to hire considerably more people, so they realize that that’s going to take a bite out of profits because labor is at a premium right now. They see wage increases because everybody else is increasing their wages. If you don’t do it too, people might leave.”

According to Hartlieb, the consensus among local business operators is that inflation is going to be around longer than the Fed — until recently — has been messaging. “The Fed had been talking about a transitory, first quarter of 2022, middle of 2022, we’ll start moving beyond this,” he notes. “The feeling among local business owners is that it’s going to move into 2023. It certainly hits different industries in different ways, but the consensus is it’s going to be around longer, so now how do you deal with it? That’s where the focus is more so than thinking this is just a temporary situation.”

Omicron register

The survey was taken after the economy felt the effects of the delta variant, but before news of the omicron variant roiled the stock market. Hartlieb doesn’t believe the latest variant will change the optimism expressed in the survey, especially after what local business owners have already faced with COVID-19 and with the related challenges — labor, inflation, and supply chain issues — they all seem to be wrestling with.

“In a weird way, it’s comforting to know that everyone is dealing with the same issues,” Hartlieb says, “and that’s where the innovation of the leadership teams of our clients is coming through in how to navigate through all that and still grow the business and grow the bottom line. We’re coming up on the end of 2021 here, and we’re seeing a lot of strong income statements from clients, and it just proves they are resilient, and they figure things out.”

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.