Economic Outlook 2013

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A spectrum of views on the indicators shaping northeast Wisconsin’s economy in the year ahead

Story by Sean Fitzgerald, New North B2B publisher

The adventure of forecasting an economic roadmap for the coming year has been relatively unpredictable in the years since the recession of 2008.

While we’ve hoped each subsequent year would offer a rebound back to the seeming economic boom leading up to 2007, we’ve experienced a much more sheepish, gradual recovery out of the economic morass over the past four years. In fact, the slow-but-steady recovery has progressed at such a pace that many business owners feel as if they’re stuck in neutral, still hanging on but not ready – or able – to make large capital investments to move forward.

A variety of national economic indicators suggest we’re back on track. Gross domestic product has increased every quarter since the second quarter 2009, albeit a less than confident 1 to 2 percent gain in most quarters. Housing starts have nearly doubled from the bottom of the market in early 2009, but are still more than 60 percent below peak levels of 2006 and 2007. The Dow Jones has clawed back during the last four years to recoup many of the losses it suffered in late 2008 and early 2009.

So why doesn’t it feel like 2008 yet?

Well, it’s not going to, even if every economic indicator today mirrored those of pre-recession times more than 50 months ago, according to a number of economic and industry experts who shared their thoughts with New North B2B on the year that lies ahead. A variety of other factors – such as credit market corrections, the looming “Fiscal Cliff” and economic performances outside the U.S. – have paved the way for future economic growth that will appear much different than it did a decade ago.

The larger view

In the big picture, growth is inevitable at some point as the cash businesses and individuals have been clinging to makes its way back into the economy, said Greg Pierce, a principal with the financial advisory firm Reinhart Partners Inc. in Oshkosh. He noted that of the firms in the S&P 500, about 30 percent of the cumulative total of their balance sheets were in cash as of the third quarter 2012, primarily holding that nearly $2 trillion in inert financial capacity due to concerns about the uncertainty ahead.

For better or worse, much of that uncertainty lifted following the elections in early November. Further clarity will be achieved as Washington makes decisions on tax policy and budget reduction, ultimately determining whether or not the nation goes over the looming ‘Fiscal Cliff.’

Individually, savings rates are up to about 4 percent now, compared with savings rates close to zero in 2006 and 2007, and a number of households have finally right-sized their own balance sheets, Pierce noted. Considering personal consumption accounts for an estimated 70 percent of GDP, improved household spending would have a powerful effect on economic growth.

The result of enhanced certainty of the road that lies ahead – even if the outcomes aren’t as rosy as possible – could provide the impetus for consumers and businesses to spend, and perhaps unleash a tidal wave of cash that’s been stowed away during the past four years.

“The stock market and the growth in this economy could be better than expected,” Pierce noted, acknowledging there’s still a question of when such spending will happen.

“If there’s a deal on the (federal) budget issues, the market will respond well. I’m waiting for the real impact of everybody not being afraid of doing what they want to do (with their money).”

A firm believer in behavioral finance, Pierce’s outlook is a robust perspective of traditional economics coupled with history, sociology and psychology. He believes historians will look back on this period 30 years from now and draw a number of parallels to the Great Depression of 80 years ago, known for cleansing the market of poor business practitioners and creating exorbinent opportunity for those willing to take risks by providing out-of-the-box solutions to their customers’ problems.

“If there’s a time to be greedy when others are fearful, this is the time to do it,” said Pierce, telling business owners to think seriously about decisions that have been on hold such as product development, buying a competitor, or other capital investment.

“We’re going to recover, and it’s going to be booming.”

On the shop floor

Wisconsin’s GDP grew by a little more than 1 percent during 2011, according to figures from the U.S. Bureau of Economic Analysis, and personal income in the state has crept up by approximately the same amount each quarter since the beginning of 2012.

Though manufacturing output and employment in the state have decreased in the past 10 years, manufacturing continues to account for the largest single portion of Wisconsin’s GDP, confirming the notion that as Wisconsin’s manufacturing sector goes, so too, does the rest of the state’s economy.

While there’s no one-size-fits-all indicator for the performance of manufacturers in the state, the Northeast Wisconsin Manufacturing Vitality Index released annually by the NEW Manufacturing Alliance has developed a reputation in just two short years of being right on target. The annual survey of 160 mid-sized to large manufacturers from the region reported 62 percent of its participants increased sales during 2012 compared with 2011, down slightly from the more optimistic projections a year ago that 71 percent would increase sales during 2012.

From a brief preview B2B was afforded of the survey results for 2013, about 68 percent are forecasting another jump in revenue for the coming year. The actual report itself is scheduled to be released publically on Dec. 7 during The New North Summit.

More than 20 percent of survey respondents a year ago anticipated expanding their facilities during 2012, a phenomena evidenced in B2B’s Build Up pages throughout the year, which saw a demonstrable increase in the number and value of building permits for industrial facilities across the region.

Unfortunately stifling manufacturing growth is the continued shortage of skilled labor to fill specific workforce needs in industry, said Mike Kawleski, public affairs manager with Georgia-Pacific operations in northeast Wisconsin and the chair of the communications task force for NEW Manufacturing Alliance. Increasing awareness of this skilled-worker shortage and bringing attention to specific job opportunities among the region’s manufacturers has become a priority agenda for the alliance.

“Manufacturers may have a market for their products, and in some cases may even have orders to fill, but so often they don’t have the people available to be able to fill those orders,” Kawleski said.

Building a workforce

A critical glimpse into a region’s economic recovery is often the number of new positions being created by manufacturers and the amount of resources those firms are putting into training that workforce.

Employer spending on staff training and worker development is often among the first line items on a budget to be cut down or eliminated altogether when companies need to pinch pennies.

Appleton-based Fox Valley Technical College had a record year for its customized worker training programs in 2012, according to President Susan May, growing revenue from its business and industry services by more than 5 percent above solid results from 2011. The technical school’s outreach to the Fox Valley employer community fulfilled 937 service contracts during the past year, more than any other technical college district in the state.

In a mid-November report to its board of supervisors, May and other district officials forecast an additional 4 percent growth from its business and industry services in 2013.

“I don’t know if we as an organization have been so badly needed by this region ever before as the economy prepares to take off again,” May said in an interview with B2B just prior to its Nov. 20 board meeting, referring to both the job preparation training it does with its more traditional students on campus as well as the on-site training it does on a contract-basis with employers to help improve their existing workforce.

The increase in demand for its customized worker training services has been driven by some employers expecting greater per capita productivity from their existing employees, May said. But it also represents a variety of employers who are expanding into new markets, adding new technology into their facilities, or are providing a larger budget for tuition reimbursement where they may have been reluctant to do so in the past.

Unfortunately, May said the message from manufacturers to turn out more graduates with needed technical skills like electromechanical engineers or CNC machine operators isn’t lost on technical colleges like FVTC. They’ve heard it loud and clear, and have responded by developing programs to deliver needed skills training in various vocations. Students simply aren’t coming, and the graduates the school produces in a number of needed manufacturing skills still falls short of the region’s workforce needs.

“We need more young people pursuing technical occupations as opposed to pursuing more broad occupations,” May noted.

Closer to home

Economists often cite the housing market as being the ultimate model for the success of a local economy, so often because such a substantial portion of the cost that goes into new home construction remains in the locale where the home is built.

Like much of the rest of the country, the housing market has been slow to rebound in northeast Wisconsin, though existing home sales and selling prices in the region have been trending upward throughout 2012, noted Joyce Bytof, chairman and CEO of Coldwell Banker The Real Estate Group.

Through the first 10 months of 2012, there was a more than 20 percent year-over-year increase in the number of completed home sales in the Northeast Wisconsin MLS, a multi-listing service area which includes most of the B2B readership region.

The number of pending home sales in the region has nearly tripled from year-ago levels, and the median sales price on closed transactions in the region is up more than 2 percent from last year. Bytof expects her own agency, which includes 26 offices across northeast Wisconsin, to eclipse $1 billion in closed volume for fiscal 2012, the first time it would do so since 2007.

“I theorize that real estate is coming back strongly into next year,” Bytof said, noting there’s a good deal of pent-up demand. She said many of her agents – which focus exclusively on residential properties – have been working with the same prospective buyers for the past 18 months, meaning they’ve been reluctant to buy because they haven’t found the right property or haven’t been able to negotiate the right price. Either way, they will buy, she said, and that’ll trickle down through the region’s economy.

“We know that housing drives every other business, and these (home buyers) will go to Suess Electronics for a new tv and to Gabriel’s for new furniture,” Bytof said.

While the amount of housing stock in the market remains at healthy levels – too little is akin to a retailer with empty shelves – much of the existing home inventory in the low to mid-priced level is being cleaned out, creating opportunity for builders who specialize in affordable housing.

“We’ve got a couple of builders who are building on spec, and you didn’t see much of that in the past three years,” Bytof said.

Much of that had to do with changes in financing, which are permanent in many cases. Only those builders with sufficient liquidity to self-fund or a substantial amount of assets to get loans are in a position to build homes on spec.

From the financial industry’s perspective, First National Bank – Fox Valley President Peter Prickett expects an increase in the housing market next year as well, fueled by both new mortgages on home purchases as well as a continuance of the mortgage refinancing boom that’s occurred since interest rates have been at rock bottom levels.

Unfortunately, he’s not as optimistic about the commercial side of the business. Prickett believes there will be overall growth in the region’s economy, but perhaps even less than the 2 percent experienced nationwide through much of 2012. He cited lower defense spending – particularly to vendors in northeast Wisconsin – as well as a weaker global economy as reasons for his restraint.

“Our customers are seeing a little bit of a slowdown,” Prickett said. “We will grow next year, but I think it will be soft growth. It’s not going to be a very strong year.”