Recession? What recession?

With low unemployment, the question of whether we’re in an actual recession is in dispute. Should local employers take steps to prepare for one?

Recession appears to be in the eye of the beholder. The nation’s gross domestic product shrank for the second consecutive quarter, which meets the technical definition of recession that economists have used for decades. However, thanks to low unemployment at the state and national levels, many economists and office holders don’t believe the economy has entered a true recessionary period.

Regardless of what your definition is, few people doubt the economy is slowing down and perhaps local employers should take the necessary steps to prepare for such a storm. Even in economically robust Madison, which has been insulated from the harshest aspects of many recessions — the Great Recession of 2008–09 and the COVID-19 lockdowns notwithstanding — employers should consider securing enough working capital and reviewing their cash flow situations in the event the situation further deteriorates.

In this presentation on the Largest 100 Employers in Dane County, we offer our annual list of the largest local companies based on workforce size, and we get some local and national perspectives on whether they will be able to maintain their current workforce size as the economic slowdown collides with the ongoing labor shortage, which is still their biggest challenge.

Full-employment recession

If we are indeed in the early stages of a recession, it certainly isn’t like other recessions — not yet. Although staff cuts at major retailers suggest the job market is cooling, the economy added a healthy 528,000 jobs in July, and the jobless rate dropped to 3.5%. Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels, according to the U.S. Bureau of Labor Statistics. Total nonfarm payroll employment rose by more than the average monthly gain over the prior four months (+388,000), and job growth was widespread in July, led by gains in leisure and hospitality, professional and business services, and health care.

Also in July, average hourly earnings for all employees on private nonfarm payrolls rose by 15 cents, or 0.5%, to $32.27. Over the past 12 months, average hourly earnings have increased by 5.2% percent.

The gain in total nonfarm payroll employment for May was revised from 384,000 to 386,000, and the change for June was revised from 372,000 to 398,000.

The employment picture also is rosy in Wisconsin, where over 3.1 million people are employed, and the unemployment rate is just 2.9%. In metro Madison, the unemployment rate for June was just 2.8%, although it did tick up from 2.2% in May.

Wisconsin Manufacturers & Commerce recently surveyed state businesses and found that business leaders have mixed views of the economy. WMC President and CEO Kurt Bauer says the two consecutive quarters of negative growth, and the Federal Reserve’s more aggressive interest rate hikes (75-basis point increases the past two times the Fed has met) reflect what WMC’s members are saying, both in the latest economic survey and via conversations. “It really shouldn’t surprise anyone,” he says. “In the past, the Fed has had to induce a recession to fight spiking inflation and it is at a 40-year high. It is analogous to economic chemotherapy. It kills the disease, in this case inflation, but it makes the patient sick in the process — i.e., a recession.”

Bauer also took aim at Congress, which at press time had been deliberating the Inflation Reduction Act of 2022, which backers says will make a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and aims to reduce carbon emissions by roughly 40% by 2030. The measure will invest approximately $300 billion in deficit reduction and $369 billion in energy security and climate programs over the next 10 years. In addition, the bill calls for comprehensive permitting reform legislation — considered essential to unlocking domestic energy and transmission projects — to be passed before the end of the current fiscal year.

Bauer, who refers to the measure as “Build Back Better light,” calls it “the last thing the economy needs” because, in his view, it would add more stimulus to an already inflated economy, and it will raise taxes on manufacturing when we should be creating incentives to re-shore manufacturing production and jobs. “This is not just an economic imperative,” he states. “I would argue it is a national security one as well.”

In WMC’s recent survey, most Wisconsin employers (62%) foresaw an increase or no change (34%) in their workforce over the next six months. Bauer acknowledges the job market seems stable for now, but that is less about the current economic conditions and more about labor demographics.

“It did not surprise us, given previous survey results and our numerous conversations with our members,” Bauer says. “We have known for years that labor is the number one economic challenge facing the Wisconsin economy now and likely beyond mid-century, barring some unforeseen and dramatic change in birthrates or in migration and/or immigration patterns. If we have a recession or are already in one, it could be unique in that it may not spike the unemployment rate the way we have seen in the past. The unemployment rate will likely increase, but jobs will still be plentiful, unless the recession is deeper than anticipated.”

Another factor that may keep the unemployment rate low, Bauer notes, is the fact that many manufacturers, and thus their suppliers, have big backlogs of orders they are attempting to fill. The cause is a combination of the lingering supply chain disruption, the broad workforce shortage, and is compounded by transportation issues, including foreign port closures, port and rail backlogs, and a day cab and long-haul trucker shortage.

The WMC survey also showed that member businesses are very concerned about inflation, and rising energy costs are a major driver of inflation, a situation Bauer places at the feet of President Joe Biden. “The Federal Reserve will have to raise rates in hopes of controlling inflation but raising interest rates doesn’t directly address the root cause of energy inflation, which is the Biden Administration’s anti-fossil fuel policies,” he states. “As a result, raising rates will be less effective on impacting rising energy costs unless rate hikes significantly slow the economy to the point where the demand for energy drops because of reduced economic activity. But if the same anti-fossil fuel policies are left in place, which is almost certainly the case, energy prices will be driven up again when the economy rebounds, which will drive inflation — again.

“The only solution is to recognize that the transition from carbon-based energy to less reliable, affordable, and storable alternative sources needs to be gradual.”

One bright spot in the WMC survey is that many Wisconsin employers still expected to offer healthy wage increases in the forthcoming year. Roughly 86% expect to raise wages by more than 3%, and 46% expect to raise wages 4.1% or above. WMC was not surprised to see continuing wage growth because the survey also shows that employers are offering many other benefits, including more vacation time, flexible work hours, remote work options, signing bonuses, and gift cards to attract and retain workers. The only potential downside on the wage front, Bauer notes, is whether the wage increases will cause a wage price spiral that exacerbates inflationary pressure on the economy.

The Great Recession of 2008–09 shattered many illusions about Madison being somewhat insulated from economic downturns, and the COVID-19 downturn hurt every local economy while the lockdowns were in place. Given the unique circumstances of today’s slowdown, Bauer still believes Madison’s economy is well positioned to weather this one and for all the usual reasons — city, county, and state government, as well as the University of Wisconsin–Madison.

However, he adds there is still a lot of manufacturing in Dane County, and manufacturers are typically slow to enter a recession and slow to rebound. “I think we may see that again if there is a downturn,” he predicts. “Manufacturers are still struggling to fill orders because of supply chain and transportation disruptions that make sourcing parts and components challenging. Again, this is compounded by a lack of workers that prevents manufacturers from staffing multiple shifts.”

As a result, WMC expects manufacturing activity to remain steady through the end of the year. But longer-term, Bauer says high-energy costs are as much as a threat to the future of Wisconsin manufacturing as the workforce shortage. “Manufacturing is an incredibly energy intensive industry, and as prices rise, profit margins drop,” he notes. “Simply put, federal energy policy is endangering the U.S. manufacturing sector when we should be using our vast domestic energy resources to re-shore industrial production and jobs.”

Bauer notes that employers have only three choices when their cost of production rises: they can raise prices, which is risky if their competitors don’t; they can lower expenses, but that is difficult to do in a meaningful way when their two biggest costs — wages and energy — are spiking; or they can offshore production to locations where workers are plentiful and energy prices are lower.

Employment: A lagging indicator

While the continuing strength of the labor market is a source of economic optimism, one national economist notes that employment is a lagging economic indicator, meaning that jobs are the last shoe to drop as the economy heads toward recession. Dan Varroney, CEO of Potomac Core Association Consulting and author of Reimagining Industry Growth, notes that with wages increasing by 5.1% and inflation rising at 9.1%, every consumer is being squeezed — a situation that is simply not sustainable.

“What we should focus on is that jobs are a lagging indicator, not a leading indicator,” Varroney states. “The thing that we’re going to see as we get deeper into a recession is significant job losses.”

Both the Consumer Price Index, which measures consumer confidence, and the Producer Price Index, which measures input costs for producers, have been trending in the wrong direction. The PPI, which rose 11.3%, is the indicator Varroney looks at most closely. He called the most recent increase “a fairly ominous” omen. “The reason is that the PPI gives us a sense that prices are going to continue to remain high as we move forward over the next month or two,” he explains. “So, while I look a lot at the CPI and inflation numbers, I also look a lot at the Producer Price Index.”

Varroney characterizes the Fed’s recent interest rate increases of 75 basis points as “appropriate when we look at why this is happening.” The Fed is trying to slow down the economy because it realizes that inflation is costing consumers a lot in the food store, the clothing store, and at the gas pump. “The issue, when you look at it, is we’re a 70% consumer-driven economy,” he noted before the U.S. Commerce Department confirmed a second quarter contraction of 0.9%. “When you look at inflation and how severe and how crushing it is, and how we’re all being squeezed with everything we buy, everywhere we shop, and at the gas pump, this is a clear picture as to why the economy contracted in the first quarter and why it likely contracted in the second quarter.”

A follow-up reading of second quarter GDP will likely revise the -0.9% figure, but few economists believe it will be revised upward to the point where it will indicate some growth in Q2. Therefore, critics of President Biden’s energy and economic policies quickly pounced on the second quarter GDP result, characterizing it as the “Biden Recession” while the president argued that the still encouraging employment picture argues otherwise.

Economist Elliot Eisenberg, who delivers an annual economic assessment in Madison for State Bank of Cross Plains, says that the National Bureau of Economic Research determines the start and end of recessions, and two quarters of negative GDP is not part of its definition. He characterizes the current state of the economy as weakening, but not yet in full-blown recession. “Two quarters is a lazy man’s approach to economics,” Eisenberg states. “What doctor would just take your temperature or heart rate? It is a combination of things. The NBER definition looks at duration, depth, and breadth. We will fall into a recession, but not quite yet!”

Banking on cash flow

Recession or no recession, the economy is slowing, and even recessionary doubters believe we’re headed in that direction. Local business operators, who might have more runway before the worse aspects of a recession arrive, should keep a couple of things in mind when recession-proofing their business — be well capitalized and mind your cash flow. With the former, your relationship with your banker or credit union is paramount and statewide, both industries are in a good position to help employers weather the storm.

The state Department of Financial Institutions (DFI), reporting on first quarter financial trends for Wisconsin’s 111 state-chartered credit unions, notes that total assets and loans outstanding grew in that three-month period. Loans outstanding grew by $852.7 million since year-end 2021, savings grew by $1.5 billion, and the delinquency ratio on loans was 0.47% compared to 0.52% as of Dec. 31, 2021.According to Kim Santos, director of the Office of Credit Unions for DFI, the financial indicators for Wisconsin’s state-chartered credit unions show a sound financial performance through March 31, 2022.

Wisconsin banks are similarly position to secure working capital for businesses. Rose Oswald Poels, President and CEO of the Wisconsin Bankers Association, reports high levels of liquidity “because our deposit levels remain strong and remain high. So, we definitely have money to lend.”

According to data provided by the Federal Deposit Insurance Corp. (FDIC), state banks saw their total assets increase by 5.04% year over year from March 31, 2021 to March 31, 2022. Despite concerns about rising inflation, total deposits were up 7.08% for the same period, and the financial health of consumers was illustrated by a 20.88% year-over-year decrease in noncurrent loans and leases.

One notable downward trend is that commercial lending decreased 14.42% year over year, as supply chain issues and worker shortages continued to limit business growth and cause hesitancy among business owners to borrow money.

Overall, however, credit quality continues to improve as more borrowers are staying up to date with their payments. Noncurrent loans and leases decreased 20.88% year over year and 5.69% quarter over quarter.

Another report is due out in late August that will cover the first half of the year, but based on her conversations with bankers, Oswald Poels expects another strong report. As long as a business can present itself in strong healthy financial position, as long as it is cash-flowing, and as long as it meets good underwriting criteria, loans will be available, she notes.

“Banks obviously make loans every day, and that’s the normal part of their business based on what they do,” she notes. “So, whether we are in a recession or whether we are in strong economic times, you can always apply to a bank for a loan. Some of the underwriting a bank goes through will drive the decision-making that happens.”

Cindy Meicher, the managing partner of Meicher CPAs, has been working with clients to do some careful planning because while there are signs of slowdown, it’s really nothing significant as of yet. One of those signs of potential trouble is higher interest rates. “Over the past few months, we’ve worked with businesses to plan for the higher interest rates by extending their debt maturities, taking out longer-term debt whereas in a different environment they might have gone more short-term,” she explains. “We are working with clients to help them accumulate cash while leaving room on their line of credit.”

Even with Paycheck Protection Program loans, never was having a six-month cushion of cash to cover operating expenses more important than it was during the pandemic, she notes. “That was really eye-opening for me to see some of the most dramatically hit businesses and how important having that emergency fund was. So, financially, our clients are planning for the higher interest rates coupled with the tighter money supply.”

With cash-flowing uppermost in the minds of lenders, Meicher also says in order to build up a cash supply, it’s a good idea to look at your expenses and identify any that are discretionary and don’t necessarily need to be paid right now. “We also have a lot of clients that are, when possible, postponing expansion in the hope that some prices will go down in the next year or two,” she adds.

Managing vendor relationships, especially accounts receivable, is also part of managing cash flow. During a downturn, businesses will be faced with the same challenges and small business owners should engage in conversations about a possible recession with their partner networks and talk about their respective game plans to gauge the potential impact on their own business. If necessary, they might have to seek alternative vendor partners. “Transparency and communication are very important with their vendor relationships, and also, managing your accounts receivables,” Meicher states. “I spoke with a manufacturer last week who is having a banner year and has been having banner years throughout COVID, but he says he spends half of his time calling up people and asking them to pay him. So, they are changing their AR practices, requiring more money in advance or upon completion of projects because people are stingier with who they pay right now.”

Another common thing Meicher is talking to business people about is how everyone is spending a lot of time searching for talent. “People are just hiring whenever they can,” she notes. “So, because of that, that doesn’t indicate to me that there have been any significant signs of a big recession. People are still trying to get people to come to work. So, we’re working with people to do more creative retention policies.”

For some of the younger people in the workforce, work-life balance is as important or more important than money. “So, having flexible schedules is important,” Meicher says. “They are also doing job shares to keep people long term.”

They are also taking advantage of programs like the Section 127 tax savings on student loan repayment assistance, which has been very popular with employers and college graduates. This program allows employers to help their employees with up to $5,250 annually of student debt payments. An employer can pay that on behalf of their employee, and they don’t have to run it through payroll and there is no FICA tax and no income tax on that benefit.

What the future holds

While Madison could be somewhat insulated, the national economy is bound to have an effect on state and local fortunes. How bad could things get? Really bad, fears Varroney, citing a recent bellwether. “We all have not only phones, but we’ve got mobile phones,” he notes. “AT&T reported that their customers are starting to fall behind on their bills. As their costs continue to increase, consumers are feeling squeezed, and they are stretching out the time in which they pay bills. That’s a big challenge.”

Editor’s note: To read the full list of our 100 Largest Employers, click here for the digital version of the print issue.

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