Business owners cautious of apparent recovery

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Out of the woods or in the eye of the storm?

SBT Reporter

The worst of the economic storm may have passed. Unemployment is down. Industrial production is up. But southeastern Wisconsin business people in the know are still hunkered down in their cellars waiting for the first ray of genuine sunshine to break through the clouds.
On the national scene, the numbers look encouraging. Industrial production at factories, mines and utilities was up .2% in May on a seasonally adjusted basis – marking the fifth monthly increase in a row, according to the Federal Reserve. Those regular increases have brought production figures up 4% since December, but that still leaves the nation 1.6% below the mark of May 2001.
In Wisconsin, positive news also abounds. May’s unemployment rate was down from 5.4% to 4.8% on a seasonally adjusted basis. The rate beats not only the national unemployment rate for the month, which was down to 5.5% from 5.7% the month before – but represents an improvement over May of 2001.
"Unemployment declined by 36,300 people," said Christopher Marschman, communications specialist at the Wisconsin Department of Workforce Development. "Nonfarm wage and salaried jobs increased by 35,000."
And best of all, manufacturing jobs increased 1,400. Every single employment category increased with the exception of government saw an increase in employment."
But while industrial output is increasing, the nation is nowhere near maxing out its capacity to produce.
Businesses are using more of their capacity – 75.5% in May from 75.4% the month before; but that is far below the average of 81.9% that characterized the economy between 1967 and 2001.
Just as telling is the fact that utilities tracked a reduction in usage for the month and the past year – that after adding 5% to their capacity in the last 12 months. Manufacturing capacity has risen only .9% over the same period.
The excess capacity will be a stumbling block for the capital-equipment economy so important to southeastern Wisconsin. According to some, even the significant incentives contained in the economic stimulus package passed in October of last year will not prompt capital spending until the trend toward recovery starts to crest.
Roger Pillsbury, senior vice president with LaSalle Bank’s Milwaukee office, characterized himself as a bear these days.
"There is a lot less capital expenditure going on than there has been in the past," Pillsbury said. "Even with the tax reform act Bush signed, which allows you to write off 30% of the cost of the machine the first year, it’s not happening. When people perceive business is picking up, they will do something. But in the meantime they will play their cards real close to their vests."
One commercial lender, however, feels the stimulus package is at least generating interest in capital expenditures among commercial borrowers.
"I have had more than one client mention the economic stimulus package," Wisconsin Business Bank Sheboygan Market President Mark Maurer said. "Anecdotally, it has had some positive effect if only because people are aware of it and are considering it."
But Pillsbury stressed that manufacturing may not rebound to previous levels due to structural changes in the economy, even once a recovery eats up existing capacity.
"The problem is there is a ton of capacity, and that capacity has to be filled before industry can pick up," Pillsbury said. "I am thinking this certainly will not happen in 2002, maybe in late 2003. But we lived in an economy we may or may never see again. Fundamentally, manufacturing in the United States is a problem. We are seeing $20 million companies that are now trying to figure out how to manufacture offshore."
Pillsbury and Maurer agreed, however, that controlling expenses and protecting cash flow are more important than ever for small businesses negotiating the changed landscape of the 21st century.
"What we have learned from the recession is that you can not control your revenue." Pillsbury said. "The only thing you can control is your expenses."
The sensitive economic climate is particularly hard for one of Pillsbury’s favorite economic indicators: foundries.
"Foundries are getting killed right now," Pillsbury said. "There is a ton of capacity; you can buy a foundry for 25 cents on the dollar. There are a lot of fixed costs in foundries; the cost of starting and stopping it is just huge."
But across the board, many businesses have gotten their costs under control.
"The good news is that people have gotten their costs in line with their sales," Pillsbury said. "A few months ago, people’s sales numbers were dropping like a rock and they did not get their costs reigned in to reflect their true revenue."
Maurer stressed that concentrating on appropriate long-term debt structure can be one way businesses can protect their cash flow and lower their expenses.
"We have had a few clients say that during this slow period, one of the best assets they have is on the liability side of their balance sheet. That – when we hear things like that, that tells us that there is some slowness in the economy. We are certainly glad that our operating mantra is getting long-term debt to long-term assets."
While Pillsbury said both of his favorite economic indicators, foundries and trucking companies, have been flat, Maurer said he is seeing some sun through the clouds.
"During the past several months, we definitely have seen a softening of the economy," Maurer said. "The events of Sept. 11 exacerbated the effects of a soft economy. But we haven’t seen any of our customers come to their knees. And we are seeing in recent months that things are starting to pick up. Is it robust? No. It will take a while for things to pick up."
"I guess I am a bear right now," Pillsbury said.

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July 5, 2002 Small Business Times, Milwaukee

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