Economic Outlook 2015

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While improvements continue, northeast Wisconsin’s economy still hasn’t blasted back, yet

Story by Sean Fitzgerald, New North B2B Publisher

Various national economic indicators from stock market performance to consumer retail spending would suggest the economy is accelerating in the U.S as the end of 2014 nears.

Equally, local indicators from existing home sales to unemployment rates to commercial and industrial construction paint a picture of a northeast Wisconsin economy that’s on its way back to pre-recession levels, but improving at a slower, more steady pace than much of the rest of the nation.

What do these trends mean heading into 2015? New North B2B spoke with a panel of northeast Wisconsin business leaders from various industries to share the trends they perceive within their own industries, as well as the larger economy in general. They offered plenty of optimistic perspectitives, but also shared some of the more stark realities defining the new post-recession recovery economy.

Overall, the region’s economy continues to tick upward. That’s positive, but it’s been slow and in many respects still isn’t near the economic performance of 2007 and 2008. Uncertainty still looms, and workforce constraints are forcing employers to take more substantial measures to become more efficient. The low-hanging fruit of waste and inefficiency existing in most firms five years ago has been rooted out.

Manufacturing come back

Performance Complete Metal Solutions in Little Chute is humming along. And so, too, are many of its customers, as well as many of its vendors further down the supply chain, according to Alex Kowalski, president and owner of the contract job shop for larger original equipment manufacturers.

One reason is that larger OEMs have become much more cautious about big capital expenditures, largely because in this post-recession environment, their customers and shareholders are requiring them to be more efficient. As a result, many are outsourcing their small-run legacy products – those products that aren’t driving profits but are still requested by critical customers.

“An industry trend has been the large OEMs are being asked to do more with less,” Kowalski said. “They still have to innovate to be competitive. So they’re using companies like ours.”

Since late summer, Performance Solutions has hired 27 new employees – brake press operators, laser cutter operators and welders – boosting its total employment from just more than 50 employees to 82 employees as of late November. Kowalski recently invested a quarter million dollars in robotic welding equipment, and is preparing for another capital expenditure of $1.25 million for a powder coat paint system.

Kowalski is budgeting for 34 percent topline growth for his company in 2015, based upon contracts Performance has already won for next year. He said many of his OEM customers are expecting at least 5 to 8 percent growth during 2015, particularly those manufacturers in the industrial, oil and gas, and aerospace sectors. He said many of his customers in the agricultural sector are projecting relatively flat revenues for the year ahead due to higher commodity grain prices.

Manufacturing was one of the first sectors to bounce back in the aftermath of the recession, said Mickey Noone, president of the northeast Wisconsin region for First Business Bank, though he said many of those gains have primarily been replacing revenues lost in 2009 and 2010. The commercial lender with offices in Green Bay, Appleton and Oshkosh published its annual First Business Economic Survey for Northeast Wisconsin in early December, and Noone revealed 64 percent of participating manufacturers are anticipating higher revenues for 2015.

Echoing Kowalski’s comments, most manufacturers aren’t necessarily planning capital expenditures to build or expand facilities, but are investing in equipment to automate more operations on the shop floor, Noone said. “A number of (companies) are just trying to improve their efficiencies.”

Construction still recovering

Readers of New North B2B’s popular Build Up pages will have noticed a recent spike in the number of commercial and industrial projects occurring across nearly every community in our readership area. But business still hasn’t quite fully rebounded to pre-recession levels for most builders in the New North, primarily because it dropped off so far.

New construction fell off by 60 percent in northeast Wisconsin from 2008 to 2009, but revenues have only come back by about 15 percent since 2009, said Dave Schultz, owner and president of Hortonville-based Borsche Roofing Professionals, citing state industry data from Associated General Contractors. Clients have begun building again after gaining more confidence in the economy in the wake of Gov. Walker’s reforms in Wisconsin, Schultz said, but “it’s still not back to where it was in 2003 to 2007.”

Like manufacturing, construction firms pursued measures in efficiency during the recession in order to survive. Schultz said Borsche Roofing is currently doing the same amount of work as it was 10 years ago, but with half the staff it employed back then. “We’ve developed a number of techniques to do more with less,” Schultz said.

Though consumer inflation has remained relatively stagnant since the end of the recent recession, the cost of construction materials has increased sharply in recent years. Schultz said material costs have been going up nearly 20 percent a year for the past two years, with some products even tripling in cost over that time.

“If you look at the cost of construction materials over the last couple of years, it’s directly in relation to EPA requirements and the cost of energy,” Schultz said.

Better on paper

Wisconsin’s legacy as a hotbed of paper making still rings true today, though it may look a bit different than it did a century ago. Though the products aren’t necessarily paper used to write on or for publishing books, innovative firms are giving identity to a Wisconsin paper industry dominant in food packaging, tissue and medical products.

Wisconsin employed about 52,000 people in the pulp and paper industries at the high water mark in 2000, and stands at roughly 31,000 in 2014, said Jeff Landin, president of the Wisconsin Paper Council. He said his organization bases its dues on the employment numbers of its members, and has been able to gauge incremental growth of a couple hundred additional jobs in the industry statewide each year for the past few years.

Landin said that’s primarily because of the innovation occurring at many of the region’s papermakers, converters and other allied manufacturers, particularly in the specialty markets. “We’re not seeing the kind of neglect or mill closures that other parts of the country are experiencing,” Landin said. And while Wisconsin paper companies aren’t investing in new mills or new paper machines, many are committing several million dollars in energy efficiency initiatives to upgrade their boilers in compliance with the federal Boiler MACT rules.

Speaking to B2B in mid-November following the general elections, Landin indicated the results – hinting at sweeping wins by the right both in Congress as well as state government – put in office “individuals who generally place a more careful balance between business and regulation,” Landin said. He hopes the political climate in 2015 provides a more productive and reasonable regulatory environment which would allow the state’s paper industry to compete and thrive into the future.

Consumers still reluctant

The recession reminded those individuals who dealt with money responsibly why it was important to remain financially diligent. Of those who were ‘pound foolish’ before the recession, many learned difficult lessons and adapted their lifestyles to preserve what assets they could salvage.

Kate Thome of Thome Benefits Solutions in Neenah said she’s finding her financial advisory firm extremely busy with older individuals who have never done any formal financial planning before. Many are within just five years or less of retirement.

“There’s certainly a trend toward people saving for the future,” Thome noted. She said many of her clients still hold a high level of confidence in the economy, and as a result are delaying substantial personal purchases. Many are even delaying their retirements. “I’m finding people wanting to work longer than ever before. A number of my clients are talking about working until at least age 66 or 67,” Thome said. The driving factor to work past the traditional retirement age has primarily been the skyrocketing costs of health care during the final years and months of one’s life and a desire to not burden one’s spouse with insurmountable debt after death.

Another lesson from the recession, Thome noted, is that investors more widely recognize developments occurring in overseas economies do impact the economy here in the U.S., perhaps more so now than ever before. Individuals are learning to respond appropriately to such international crises as they pertain to their long-term financial plans.

Real estate still bubbling?

First Business Bank specializes in commercial real estate lending, and Noone said data generated by his financial institution indicates the market for office and retail space still has a way to go in its recovery.

“Commercial real estate has not fully bounced back in northeast Wisconsin,” Noone said. “It’s way off of what we see in (the bank’s) other markets like Milwaukee and Madison.”

Those landlords that did struggle with high vacancy rates or tenants who couldn’t pay rent were often “flushed out of the system,” Noone said. Many of his commercial real estate clients still maintain rather depressed rent pricing in response to the wide availability of space during the recession. As more elite class A office space is beginning to fill across the region, Noone said there’s a conceivable bubble on the horizon.

In contrast to commercial real estate, Noone described the development of apartments and other multi-family housing across northeast Wisconsin as “booming.”

Workforce issues

Discussion regarding skills gaps and workforce shortages has certainly become more prominent during the past three years, and all our panelists mentioned the issue as a top challenge.

Kowalski acknowledged he’s been fortunate filling open positions in the plant at Performance Complete Metal Solutions, but recognizes the skills his operations demand don’t require masters or journeyman-level aptitude.

Where that is a problem at other manufacturers, Noone said his customers in goods-producing industries are investing in automation when it makes sense, particularly if the prospect of finding qualified, skilled employees appears more difficult in the next few years.

Landin said the workforce shortage issue isn’t foreign to the paper industry, indicating its workforce demographics have kept talent development on the radar for some time.

“The paper industry is perhaps more pronounced,” Landin said. “This workforce is aging, and we’re going to see a mass exodus in the paper industry. We do need to have a lot more homegrown talent.”

To that end, the Paper Council has been collaborating with schools and local school-to-work programs through chambers of commerce to enhance the reputation of paper industry jobs as attractive career choices existing close to home.