The U.S. economy is poised for growth in the second half of the year, and companies that are too tired or timid to embrace that growth are at risk of being left behind, according to Daniel Sem, Ph.D., newly appointed dean of the School of Business Administration at Concordia University Wisconsin.
Sem was interviewed for the BizTimes Mid-Year Economic Forecast by BizTimes executive editor Steve Jagler. The following are excerpts from that interview.
BIZTIMES: The national GDP unexpectedly dipped in the first quarter. Was that just a seasonal blip? Or do you think there is any chance the economy could be sliding into another recession?
SIM: “Just a seasonal blip. The actual GDP contraction of 0.2 percent was quite modest; not as bad as earlier estimates. Some of this is due to oil prices on the decline and consequences from that trend. For example, the mining sector (which includes oil and gas) cut 17,200 jobs last month. If you look a little deeper, the signs are there to indicate things could really pick up now; maybe even take off. For example, the employment outlook is looking up, with unemployment now down to 5.6 percent, an improvement over a year ago when it was 6.7 percent, according to the U.S. Labor Department.
“Furthermore, consumer spending is up (2.1 percent in the first quarter), and companies are increasing their inventories, which bodes well for future growth. Home building and improvements are also up 6.5 percent (versus 5 percent last year). Consumers have more money to spend (savings increased $720 billion in the first quarter), and they are spending that money – driving the economy. Things will definitely pick up.”
BIZTIMES: At what pace do you expect the U.S. economy to grow in the second half of the year?
SEM: “I think we are in for some real modest to significant growth. As I said above, the signs are there. We’ve had GDP growth of 2.9 percent over the last year. With the current indicators for consumer spending and confidence, (and) also with improved employment and consumers having more savings to spend, I think we can top 3 percent in the next year.”
BIZTIMES: Which industry sectors are poised to grow in the second half of the year?SEM: “Probably manufacturing and construction will see significant growth. Sales of new homes were up 23.7 percent in the first four months of 2015, which is driving growth in construction and has led to 17,000 new hires. And there have been record numbers of new cars purchased, reaching levels not seen since 2005; this led to 7,000 new manufacturing jobs, predominantly in the auto sector. But we can also expect growth in retail, health care and hospitality – these sectors have added 31,400, 57,700, and 57,000 jobs, respectively.”
BIZTIMES: Which industry sectors are poised to be challenged in the second half of the year?
SEM: “Obviously the energy sector – and especially anything related to oil and mining – has some challenges ahead. But let’s step back a bit and take a broader view of Wisconsin’s economy, not just in this quarter or this year. We really do have to expand more into entrepreneurial and high-technology realms if we hope to see more significant and sustained growth. Startups and technology companies are an engine for job and economic growth. This is an area of significant challenge for Wisconsin.
“Wisconsin’s manufacturing sector is a strong and significant industry, making up 20 percent of all jobs in Wisconsin. While manufacturing is something for us to be proud of, it is not typically a source of entrepreneurial activity and new companies (and jobs). Therefore, we need to be consistently moving to higher technology manufacturing and to other technology sectors. There is, of course, some of this occurring already, with a number of Wisconsin companies involved in precision manufacturing and design (e.g., Johnson Controls; Rockwell Automation), as well as advanced chemical manufacturing (Sigma-Aldrich; Cambridge Major Laboratories). But we need to make greater strides into this high technology realm, including 3D printing/manufacturing, medical devices (e.g., leveraging GE Healthcare), as well as health care informatics (e.g., Epic).
“The future for Wisconsin is in high tech, and in startups that create the next generation of jobs. Wisconsin was recently 50th (dead last!) in a Kauffman Foundation Index of Startup Activity. Arguably, the survey did not measure what some view as valid metrics, and other surveys have scored us higher. But we clearly have work to do. But there are a number of very promising state (through Wisconsin Economic Development Corp.’s Catalyst program), private (Brightstar; Gener8tor) and university (e.g., Concordia’s CU Launch; the regional Healthcare Innovation Pitch Event) initiatives that are fostering startup formation in Wisconsin. We can expect to see the fruits of these and more such initiatives in the coming years, I hope! Thus, while the startup situation in Wisconsin may have been fairly dismal, I think it is really poised to take off. And on a brighter note, Wisconsin did rank third-best nationally for small business growth in the last 12 months. This is a significant area of challenge and of growth for Wisconsin.”
BIZTIMES: What is the outlook for the housing market?
SEM: “Extremely good. These are exciting – maybe, dare I say – boom times for housing. Home sales are up 24 percent in the first quarter already. We have clearly rebounded from the 2008 bust, and growth is now significant again. In contrast, there are some worries (from a recent Bloomberg report) that Canada, which never experienced the housing bust that we in the U.S. did – is in for a bust. Their growth has continued unabated for the last 15 years, and may be due for a day of reckoning.”
BIZTIMES: Do you think the Fed will raise interest rates in the second half of the year? If they do, won’t that be a net positive for the U.S. banking industry?
SEM: “Well, we can’t stay at near zero rates forever. The Fed has hinted at rate increases, but only if the economy shows the kind of growth I am suggesting will happen here. In that case, the economy can handle it and the banking industry will benefit. One recent Fed statement suggested the odds of 50-50 for us hitting the economic growth levels needed to warrant a rate increase by this September. I think the increase will come a bit later, but the economy can handle it.”
BIZTIMES: What is the outlook for the U.S. stock market?
SEM: “The strong and positive economic forecast for growth bodes well for the stock market. The Dow Jones has been consistently rising for the last five years, on an unusually linear path; there seems to be no reason to expect that to change. Of course, if I could really predict these things, I’d be relaxing on my island in the Caymans now.”
BIZTIMES: How badly is the strong U.S. dollar affecting American manufacturers?
SEM: “The dollar is strong, having appreciated 19 percent in the last year. This, combined with weaker demand abroad, is of course hurting exports. But, as Janet Yellen noted, this is not a bad thing – being as it reflects a strong economy. Unpredictability in the EU is in play because of Greece’s financial problems; and China seems to be experiencing some changes related to their increased debt burden (learning from us in the West?).”
BIZTIMES: Some of the largest retail outlets, such as Walmart and McDonald’s, are voluntarily raising their minimum wages. Are they putting pressure on other companies to do the same to compete?
SEM: “Yes, and I think that is great. Likely they are doing it in part because of consumer pressure – that is, market forces. Workers need a living wage. There are, of course, valid arguments put forward by most self-respecting free market economists that a change like this should come from industry rather than from government. In an ideal world, that is true. It is great if these prominent companies lead the way and put pressure on other companies to follow suit.”
BIZTIMES: Would an increase in the federal minimum wage be a boost to the economy or a hindrance?
SEM: “I think we need a higher minimum wage; and, I prefer if it comes from industry directly. But if it doesn’t, the federal government will step in eventually and make it happen. Maybe that threat is healthy, to add motivation for companies to do the right thing. Obviously, there is a balance here. More pay will lead to more spending and drive the economy. Conversely, it may mean fewer jobs for workers at the lowest end of the job/pay ladder. On the whole, though, I think it is a plus.
“If consumers are willing to pay a bit more for their cheeseburger so that they know the workers are being treated fairly (I hope that is the case), then my faith in society and in market forces remains strong, and such considerations become part of what one is purchasing; part of the economy. This could be the innovation that the enlightened millennials, who gave us TOMS shoes and Fair Trade coffee, will give to our new economy.”
BIZTIMES: With the outlook for the economy overall so strong, do companies that are timid – i.e., afraid to launch that additional product line or service, afraid to add to their workforce, afraid to expand their plants, afraid to redesign their websites, etc. – put themselves at risk of missing strong opportunities for growth?
SEM: “Absolutely. Current numbers suggest companies are more timid than is warranted by the economic trends. This risk aversion is exemplified by the fact that business investment (e.g., R&D, machinery) fell by 2 percent, and new orders for durable goods are down 1.8 percent, decreasing the third time in the last four months. Industry remains hesitant to pursue business equipment investments. Apparently, they remain somewhat skeptical that growth is ahead; and yet employment is up, consumer savings and confidence are up, and consumers are buying more (homes, cars). Isn’t it time for industry to respond? There is growth coming, but only for those companies who prepare for it strategically and in a timely way; those that don’t will be left in the tracks of those with foresight and courage. But hey, that is what capitalism is all about.
“As the saying goes, ‘Go out on a limb. That’s where the fruit is.’ And if companies can’t tolerate that level of risk because they need to feel everything is always under control, they should consider the words of Mario Andretti: ‘If things seem under your control, you are just not going fast enough.’ Of course, I spent 10 years in California’s startup world – maybe it’s showing now. Then again, California’s GDP growth is over twice that of ours. Let’s do this!”