Tempered by a housing market hangover, a slumping American automotive industry and the costly war in Iraq, most economists are projecting slow growth of 2 to 3 percent for the U.S. economy in 2007. As the figures suggest, growth will be attainable. However, that growth will have to be earned, and it will usually come in small increments, as companies that are prepared to make the slow climb are able to grind through or around the obstacles in their paths.
The largest obstacle of all may be the lingering housing bubble, recession or correction – depending upon which economist you are listening to. Whatever it is, it is cramping the spending of consumers, many of whom can no longer tap into their home equity lines of credit.
“We continue to hear that the weakness in housing has not spread to other parts of the economy. To that we say, ‘Not so,’ and, ‘You ain’t seen nothin’ yet,’” said Paul Kasriel, director of economic research at Northern Trust Corp. “The year-over-year growth in combined real personal consumption and business equipment/software expenditures, at 3.1 percent in the third quarter, is the slowest since the second quarter 2003 and is down 130 basis points from its year-ago growth. That takes care of the ‘not so.’”
Kasriel, who is projecting 2 percent economic growth over the first three quarters of 2007, says the economy will be marred by a “housing recession” that will carry over and dampen other sectors.
“Based on the excesses of the past real estate boom, the considerable supply overhang and the typical peak-to-trough behavior of residential investment expenditures, we continue to expect that the trough of the housing recession is not near at hand,” Kasriel said.
Bruce Bittles, chief investment strategist for Robert W. Baird & Co. Inc., says the “correction” in the housing market will limit U.S. gross domestic product growth to 2.5 to 3 percent in 2007.
Bittles is in the camp that believes the economy will make a “soft landing” in 2007, rather than an abrupt drop.
“Housing represents only a small part of the U.S. economy, but it has a large influence on a wide variety of industries and also has an important psychological impact on consumers,” Bittles said.
Ronald Sadoff, founder of Sadoff Investment Management LLC in Milwaukee, says the economy will struggle in 2007 to overcome the “aftermath of the housing bubble.”
The number of property foreclosures soared in southeastern Wisconsin in 2006, as consumers grappled with an icy cold housing market, increased minimum payments for credit cards and rising adjustable rate mortgages.
Foreclosures.com, a Sacramento, Calif.-based real estate investment advisory firm and publisher of foreclosure property information, tracks foreclosures in 17 Wisconsin counties. Among them, Milwaukee County’s foreclosures increased 51.5 percent to 4,886 in 2006 from 3,225 in 2005. Waukesha County’s foreclosures increased 48.8 percent to 558 in 2006 from 375 in 2005, and Racine County’s foreclosures grew 21.0 percent to 288 from 238.
Automotive blues
Be it a recession, a correction or a bubble, the cooled housing market is coupling with the troubled American automotive industry to create an economic double-whammy in the Midwest.
Compared with most states, Wisconsin’s economy still has a relatively high base of manufacturing jobs, and many of those jobs produce parts that are used in the automotive industry.
According to a recent survey of 173 Wisconsin manufacturers by the Wisconsin Manufacturing Extension Partnership (WMEP), 44 percent said they lack the internal resources to implement growth strategies such as new product development, market expansion and sales growth. Many of the hand-strung manufacturers are smaller companies with less than 100 employees and less than $11 million in annual sales, according to Michael Klonsinski, executive director of the WMEP.
“Clearly, the survey underscores the need for services to help Wisconsin’s small and mid-size manufacturers adopt innovative growth strategies,” Klonsinski said.
Indeed, innovation may be the redeeming attribute for Wisconsin manufacturers striving to compete in a global economy.
In the automotive industry, American manufacturers carry higher employee health care costs than their foreign competitors, who have cheaper, national health care plans. The Detroit equation will likely darken before it gets better, as Ford and General Motors have fallen behind Toyota and Honda in embracing and deploying technologies for more energy-efficient hybrid cars.
American manufacturers do have one economic trend in their favor at the moment: the low value of the U.S. dollar makes their goods more affordable for foreign customers (see story on page 30).
Although the national manufacturing barometer may be stagnant or falling, many manufacturers in southeastern Wisconsin remain optimistic. In fact, 80 percent of the manufacturers surveyed in the Metropolitan Milwaukee Association of Commerce (MMAC) Business Outlook Survey are predicting sales growth for their companies in 2007 (see story on page 20).
Many of Wisconsin’s manufacturers who did not embrace lean manufacturing and other strategies to compete in a global economy dried up and died in
the 1990s, and those who remain tend to have found industries and business models that enable them to compete, according to Linda Kiedrowski, president of The Paranet Group Inc., a Brookfield-based consulting company for manufacturers.
“The truth is that where manufacturing is hurting, it is hurting big time. Adverse factors include the rising costs of raw materials and energy, the downturn in automotive and agricultural industries, a lack of skilled workers, inefficient processes and offshore competition,” Kiedrowski said.
“However, there is always the other side of the story. Many manufacturers are prospering. Sheet metal fabricators who basically manufacture on a ‘one job at a time’ basis, are all growing and using lean principles to be competitive and flexible,” Kiedrowski said. “Strattec Security Corp. (in Glendale), Spacesaver Corp. (in Fort Atkinson) and MEC Companies (in Glendale) are applying innovation as one of their key competitive tools. Modine Manufacturing Co. (in Racine) and Koss Corp. (in Milwaukee) are expanding through new markets, and Brady Corp. (in Milwaukee) continues to grow through acquisition and global positioning. These are just a few of the many examples of companies that are doing what it takes to thrive in this manufacturing environment. These are exciting times for manufacturers who can be flexible and innovative enough to take advantage of a changing world.”
Bret Mayborne, economic research director for the Metropolitan Milwaukee Association of Commerce, said, “I think it is true that manufacturers regionally have been in an adjust-or-die mode for a number of years. Some companies in the auto industry, for example, have not adjusted well (i.e. Delphi and Tower Automotive) to supply-chain and global competition and no longer operate in the region, while some have successfully navigated the changing environment (i.e. Johnson Controls Inc.).”
War wounds
Aside from its obvious adverse human impact from the standpoint of casualties, the Iraq War also is dampening the economy and will postpone any chance of eliminating the national debt for years.
The cost of the Iraq war could top $2 trillion, far above the Bush administration’s pre-war projections, according to a new study, which takes into account long-term costs such as lifetime health care for the 16,000 American soldiers who have been wounded so far.
The study by Columbia University economist Joseph E. Stiglitz, who won the Nobel Prize in economics in 2001, and Harvard lecturer Linda Bilmes says U.S. taxpayers will be burdened with the costs of the war for years.
“Our analysis starts with the $500 billion that the Congressional Budget Office openly talks about, which is still 10 times higher than what the administration said the war would cost. Its estimate falls so far short because the reported numbers do not even include the full budgetary costs to the government. And the budgetary costs are but a fraction of the costs to the economy as a whole” Stiglitz said.
“For example, the Bush administration has been doing everything it can to hide the huge number of returning veterans who are severely wounded – 16,000 so far, including roughly 20 percent with serious brain and head injuries. So, it is no surprise that its figure of $500 billion ignores the lifetime disability and health care costs that the government will have to pay for years to come,” Stiglitz said. “Nor does the administration want to face up to the military’s recruiting and retention problems. The result is large re-enlistment bonuses, improved benefits and higher recruiting costs – up 20 percent just from 2003 to 2005. Moreover, the war is extremely wearing on equipment, some of which will have to be replaced.”
The full report is available at www.project-syndicate.org/commentary/stiglitz67.
Small-business growth
Still, anecdotally, several small-business executives tell SBT they remain optimistic about their individual companies’ prospects in 2007 (see story on page 18).
For instance, Nancy Hernandez, founder and president of Abrazo Multicultural Marketing & Communications in Milwaukee, expects her company’s revenues to grow by 60 percent in 2007. When asked to explain the reasons for her optimism, Hernandez told SBT, “Market penetration, more customers now buying what we are selling and new product development.”
In other words, hustle, marketing and innovation continue to drive southeastern Wisconsin’s most vibrant companies.
