Optimism abounds

It’s a bit early to sing Happy Days Are Here Again, but most key industry sectors expect another strong economic year.

From the pages of In Business magazine.

These days, most economists find it hard to contain their excitement about the state of the economy, and they have plenty of data to back their bullishness on everything from high growth to low inflation.

Reasons for optimism are as plentiful as snowflakes in January. Locally, metropolitan Madison’s unemployment rate of 2.2% remains the lowest in Wisconsin and harkens back to the days of the dot-com boom.

Wisconsin’s 3.4% unemployment rate is its lowest for the month of October in 18 years, more state residents are now employed than ever before, and the labor force participation rate (68.8%) is six percentage points above the national rate. The Foxconn Technology Group development is expected to create such a demand for workers that the state is devoting $6.8 million to recruit people from the outside, in part so that the Taiwanese electronics manufacturing giant doesn’t take all its workers from existing employers.

Nationally, consumer confidence has soared to a 17-year high, the U.S. Commerce Department has just reported consecutive quarters of 3% or higher growth, the stock market has reported several record closes, and while this is hardly a consensus view, advocates for tax reform believe it will sustain the recovery, at higher rate of growth, for several more years.

Elliot Eisenberg, an economist with GraphsandLaughs LLC, presented his mostly upbeat forecast recently in a program sponsored by State Bank of Cross Plains. With notable exceptions such as the availability of labor, just about every measure — GDP growth, inflation, consumer and business confidence — is either solid or rising.

One reason Eisenberg is so bullish is the U.S. is gaining ground simultaneously with other western democracies. “The global economy hasn’t been this solid since 2006–07,” he notes. “In the recent past, our economy was pretty decent but other economies were weaker. Now they are all pretty strong. This is about as good as it gets.”

Manufacturing: With success comes challenge

With a synchronized global economic recovery, all 45 industrial countries (even Greece) are growing. Few industry sectors benefit more from the growth synergy among western democracies than Wisconsin manufacturing, a sector that gained nearly 3,800 jobs in the 12-month period ending June 30, 2017, and that’s thanks in part to improving trade activity.

To say this sector is humming is understating things, especially if the annual First Business Economic Survey is any indication. According to the survey results for Dane County, the percentage of manufacturing respondents expecting an increase in actual sales increased sharply in 2017 from 53% to 76%, setting a new historic high. Ninety percent project a sales increase for 2018, also a new historic high, and profitability saw a 10% increase to 63% in 2017, yet another historic high.

In addition, 52% report an increase in their number of employees, just 4% below the historic high, but the percentage of those projecting an increase in the number of employees for 2018 jumped from 47% to 71%, another all-time high.

Even more encouraging, 86% of respondents reported an increase in wages, up sharply from 59% the previous year, and 95% project wage increases in 2018, another new historic high. While 43% reported an increase in actual capital expenditures (10 points below last year), those projecting an increase in 2018 was 48%, yet another a historic high.

This activity also is attributed to a weaker dollar, which helps U.S. exports, reasonable labor costs, moderating energy costs, and growth in business investment for plants and technology.

Buckley Brinkman, executive director/CEO of the Wisconsin Center for Manufacturing and Productivity, says there have been few times when manufacturing has been stronger. “I just saw some statistics from the Chicago Fed that say we’re at an all-time output high, and we’re at one of the highest utilization rates we’ve been at for a long time,” Brinkman states. “Usually when those things happen, you see investment come in behind it.”

The main worries include President Trump’s trade and immigration policies, the former because of the benefits of the North American Free Trade Agreement, and the latter because of its potentially restricting impacts of the availability of labor. Even the biggest potential boon, the Foxconn development, brings “body count” worries.

“It’s one of those things that’s a real double-edged sword,” Brinkman notes. “On one side, you’ve got the tremendous pressure it’s going to put on the workforce. On the other side, most people don’t get how cosmic this is. This is an industry that we surrendered. We just forfeited it four decades ago when Zenith made the last television and all that moved to the Far East.”



Information technology: Growth and growing pains

Another industry with its arrow pointed up is information technology, as Wisconsin has been climbing higher in tech-industry rankings like CompTIA’s “Cyberstates” report and the recent “New Economy” index from the IT & Innovation Foundation, but while that improved performance shows we’re on the right track, Wisconsin and Greater Madison could be undermined by workforce challenges.

Serious workforce challenges. Consider that while CompTIA reports that Wisconsin added 3,900 technology jobs in 2016, it also notes that Wisconsin employers posted 2,656 cyber-security job openings during the 12-month period that ended in September 2017. Since there are already an estimated 9,000 cyber-security workers employed in Wisconsin, the number of openings speaks volumes about the high demand and the low supply and the growing importance companies place on securing data.

One potential solution is to leverage university computer science departments to a greater extent, especially UW–Madison’s. The Wisconsin Technology Council has been advocating that these departments grow in stature and faculty for some time. “Information technology was once the province of almost a select few within certain industries and certain companies,” notes Tom Still, president of the Wisconsin Technology Council. “Today, it is the driving force in many industries and many companies. It is impossible to imagine a world and an economy right now that does not involve IT at some level, and usually a significant level.”

Still notes the local tech industry has never been stronger, both in terms of the strength of the various sectors, as well as the increasing diversity of those sectors. One of the things that strikes him about Dane County is that it’s an area where you can find diagnostics, medical devices, increasingly some therapeutics, regenerative medicine, advanced manufacturing, clean tech, software, health IT, and gaming.

“For a county of roughly 530,000 people, that’s remarkable diversity, and it adds to our overall strength as an economy because we’re not dependent on any one sector,” Still says. “There was a time about 10 or 15 years ago where you could say the county was more dependent on a variety of biotech companies and those companies are still very strong and that sector has grown, but so have others. It has simultaneously stabilized and expanded the tech economy in Dane County.”

Statewide, Still notes solid tech growth in the Chippewa Valley, the La Crosse area, western Wisconsin, and the Fox Valley. The recent announcement of an innovation hub sponsored by Microsoft and the Green Bay Packers — Titletown Tech — holds promise for northeastern Wisconsin, and Foxconn’s arrival in the southeast promises to transform that region over time and enhance what’s happening elsewhere. “There are still a lot of spots that need help,” Still acknowledges, “but there is no denying that the growth of the tech economy, and in some fairly diverse ways, has begun to spread around Wisconsin.”

Comp TIA’s Cyberstates report indicates that Wisconsin ranks 20th nationally in tech employment. Perhaps the state’s biggest motivation is that annualized wages in Wisconsin’s tech industry average $79,500, or 74% higher than the average state wage.

Health care: Will demographic tsunami be enough?

If you thought merger mania in the health care space was unsettling, two recent events carry some level of portent for the industry. UW Health’s plans to cut $80 million over the next 18 months shook up the local market, and the news of CVS Health’s $69 billion deal to acquire health insurer Aetna means more consumers could receive routine medical services at the pharmacy rather than the clinic.

There also is the specter of Amazon moving into the medical insurance space — no small worry for executives fretting about technologically disruptive business models — and the uncertainty caused by possible attempts to modify the Affordable Care Act in a piecemeal fashion after attempts at full repeal failed.

Given the tsunami of aging that is just beginning in the U.S. and global populations, the surface temptation is to proclaim the future of health care as bright, but there are too many cost pressures to think the drive toward greater efficiency won’t claim more jobs and drive more innovative approaches to care delivery.

These pressures occupy the thoughts of Eric Borgerding, executive president of the Wisconsin Hospital Association. Given low Medicare and Medicaid reimbursement, which remains well below the cost of providing care and results in a combined of $2.8 billion in cost shifting to individuals and businesses, and the exploding cost of pharmaceuticals “across the board,” not just niche medications, hospitals and health systems are being squeezed.

Borgerding references an American Hospital Association study that says the cost of inpatient drugs jumped an average of 24% per year from 2013 to 2015. As he notes, much of the focus on drug costs is centered on the consumer market, but little attention is paid to how rising prices impact the cost of hospital and clinic care.

Workforce worries also cloud the industry’s future. A WHA survey found that Wisconsin’s over-65 population is expected to double by 2030, and 20,000 registered nurses are expected to retire by the same year. Doctors aren’t getting any younger either, but state matching grants and the expansion of the Medical College of Wisconsin to Green Bay and Wausau should help increase the number of physicians in residency. The program will have to be expanded to meet long-term demand.

Borgerding acknowledges the angst surrounding health care but notes that Wisconsin’s lofty position in various rankings for quality and access — which he attributes to a high level of integration and alignment — “is the envy of the rest of the country.”



Finance: Where’s the appetite for risk?

There’s nothing like a Great Recession to serve as an appetite suppressant, especially when it comes to the willingness to assume risk. While Wisconsin banks and credit unions report steady loan growth, the national picture is somewhat puzzling.

Loan growth at banks has slowed to it lowest level since the fourth quarter of 2013, according to third quarter 2017 data from the Federal Deposit Insurance Corp. It marked the sixth straight quarter of decline in this measure, as growth in each of the four major lending categories declined, including business lending.

Locally, while there was an uptick in 2017, the comparative lack of interest in ramping up business borrowing was a topic of discussion last month at the annual First Business Economic Forum. Given their experience during the Great Recession, local businesses still favor using higher profits to shed debt, or “deleverage,” which is “a predictable situation” given what they experienced during the recession, notes Jim Hartlieb, senior vice president of First Business Bank.

Third quarter 2017 data shows that in Wisconsin, overall bank lending increased 5%, including 3.5% in commercial and industrial loans and 10.8% in farm loans. “In Wisconsin, we have seen steady growth over past few years, including 2017,” notes Rose Oswald Poels, president/CEO of the Wisconsin Bankers Association. “By that, I mean we haven’t seen huge peaks or large jumps in lending.”

Given the high level of nonperforming loans that contributed to the financial crisis of 2008–09, perhaps the best news is that such “toxic debt” is declining. Among banks, noncurrent loans and leases fell by 18.6% in the third quarter, and Wisconsin credit unions not only reported double-digit lending growth in the first nine months of 2017, they also enjoyed a lower delinquent loan ratio of 0.67%.

“People are paying with greater regularity and on time, and that’s a great indicator of what may lie ahead for us in 2018,” states Brett Thompson, president and CEO of the Wisconsin Credit Union League.

The outlook is even brighter for angel and venture capital, as Wisconsin already is beginning to see more deals and dollars invested. The Wisconsin Technology Council’s 2017 “Wisconsin Portfolio” report, which tracked 2016 activity, recorded $276 million in 137 individual deals. The average value of each deal went from $1.5 million the previous year to $2 million.

Notes Tom Still, president of the Wisconsin Technology Council: “It shows an increasing awareness of Wisconsin.”

Geopolitical ripples

The Dow Jones milestone mania has stock market “bulls” proclaiming that a 30,000-point Dow is well within reach, but while optimism is in long supply, is there anything that could derail the good times that appear to be ahead?

Given the economy is highly influenced by consumer confidence, geopolitical events could puncture that confidence, and possible military action against North Korea is the most oft-cited trigger. It’s no coincidence that two of the stock market’s worse days of 2017 came after President Trump promised to rain fire and destruction on the so-called “Hermit Kingdom,” which has been provocatively testing ballistic missiles with greater and greater range. After the latest North Korean missile test, President Trump’s national security advisor H.R. McMaster said the potential for war with North Korea “increases every day.”

While some point out that such a scenario is in neither country’s best interests, the president’s rhetoric has people worried. “We all saw what happens when a 9-11 occurs,” recalls Jay Loewi, CEO of the QTI Group. “The world has a tendency to stop and you take a hard right or a hard left, but at this point, without something like that happening, I see fairly strong economic times ahead for the next year or two.”

Corey Chambas, president/CEO of First Business Bank, notes that dramatic global events can shake people’s confidence and cause a ripple effect. “Consumer confidence has been great lately, but if consumer confidence goes down because the stock market is down, consumers stop spending as much and businesses become less optimistic,” he states, “and so I do think you could see something from outside our borders that could quickly change the economic outlook.”

First Business survey: Is optimism justified?

Historic highs and lows dot this year’s First Business Economic survey results, and while the term high-low might suggest fluctuation, they’re all on the positive side of the ledger as local business leaders feel the optimism heading into 2018.

The annual survey, conducted over the fall and presented in December, tracks actual 2017 and projected 2018 performance in several categories. Overall, it shows that 99% of companies expect improved or unchanged performance in 2018, with 79% anticipating improvement.

Whether their optimism is based on solid economic data, “irrational exuberance,” or a combination of both, there are several historic landmarks in the 15-year-old survey.

For example:

  • Fifty-three percent project hiring increases, a new historic high. Finding employees to hire will be the challenge.
  • More than three quarters of businesses (78%) reported higher wages in 2017, beating the previous high in 2006, and only 2% of respondents expect a decrease in their projected number of employees for 2018, a historic low.
  • A new historic low of 3% expect a decrease in 2018 projected sales.
  • The low percentage of companies that actually decreased capital expenditures (8%) marked a new historic low, and more than nine out of 10 companies increased or maintained their capital expenditure levels in 2017.

For Dr. Moses Altsech, a faculty member at UW–Madison and president of Altsech Consulting, which conducted the survey, the optimism of local businesses is based on strong data and fundamentals. “If you look at the numbers, they really do look very solid — strong corporate earnings, low unemployment, and a lot of really positive economic indicators,” Altsech says. “If it wasn’t for those, one could say it’s wishful thinking or irrational exuberance.”

Corey Chambas, president/CEO of First Business Bank, thinks there is a bit of solid foundation and irrational exuberance. “Right after Trump was elected, everybody was really optimistic on the business side, but nothing happened,” he states. “Now, maybe there is something that has real economic impact that’s coming with the tax cuts, so there is a little bit of reality to it.”

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