Mid-year Economic Forecast

After a prolonged, brutal and sometimes painful winter, southeastern Wisconsin businesses have begun a summer surge that is expected to gather steam and recover some lost ground in the second half of the year.

According to the BizTimes Mid-Year Economic Dashboard Survey, most reader respondents are projecting healthy increases in revenues and profits in the remainder of 2014. Seventy-three percent are forecasting increased revenues, while 60 percent expect increased profits.

Forty-seven percent are expecting to hire more employees in the next six months, matching another 47 percent that project flat hiring trends. Only 6 percent expect to cut back on their staff.

Jack Ablin

Among some of the other Mid-Year Economic Dashboard Survey results for 2014:

  • 53 percent plan to make significant investments in equipment.
  • 13 percent plan to expand their office/plant space.
  • 13 percent plan to move to a new location.
  • 60 percent are offering an employee wellness program.
  • 60 percent are expecting employee health care benefit costs to increase by up to 10 percent.
  • 71 percent are passing some or all of those health care benefit costs on to employees.
  • 67 percent are increasing their investments in branding, advertising and marketing.
  • 60 percent have a social media strategy.
  • 14 percent have developed a customized smartphone “app” for the company.
  • 86 percent will provide employee pay raises this year.
  • 80 percent will increase the prices of goods or services this year.

When asked to describe the condition of Wisconsin’s business climate, 47 percent said they believe it is improving, matching the 47 percent that say it is flat. Only 6 percent believe it is declining.

Among some of the comments by respondents in the survey:

  • “As the shortage of qualified workers continues to increase, companies will have to look at non-traditional approaches in recruitment and retention. This will result in an increase of my business since that’s my approach,” said Kathy Bornheimer, founder and recruiter at K.B. & Associates in Milwaukee.
  • “We all need to stay focused and keep working hard. Things are improving but we are not out of the woods. Let’s get some debt behind us and build our cash reserves. We need great growth for the next five years and more,” said Chad Schultz, president of Innovative Signs Inc. in Waukesha.

To gain an expert overview for the BizTimes Mid-Year Economic Forecast, we turned to Jack Ablin, chief investment officer at BMO Private Bank, a part of BMO Financial Group. The following are excerpts from that interview.

BIZTIMES: Let’s get right to it. The U.S. Gross Domestic Product dipped in the first quarter. Was that just a blip in the recovery, maybe caused by a winter that dragged on interminably? Or is it the start of a slowdown in the economy?

ABLIN: “Speaking as a Midwesterner, the weather last winter was extreme. Too extreme to seasonally adjust in economic parlance. We estimated there were as many as 50,000 flights canceled in the first quarter. The good news is the weather got better, and the economy bounced back. Job growth in April and May exceeded 200,000. The average monthly jobs gained over the previous 12 months, and auto sales are strong on the back of improving consumer confidence. The economy is looking up. Job opportunities are expanding, retail activity is healthy. Corporate balance sheets are flush with cash, and business sentiment is improving. At the same time, lenders are loosening up their purse strings and the ability to borrow is at its easiest point since the recovery began. All of this adds up to impressive growth, albeit not accelerating growth. Auto sales are strong too. Keep in mind, the average age of an automobile on the road today is 11.5 years. That means for every car that’s five years old, there’s a 17-year-old automobile.”

BIZTIMES: At what pace do you expect the U.S. economy to grow or contract in the second half of the year, and why?

ABLIN: “I think the economy has the opportunity to grow in excess of 3 percent for the remainder of the year. While consumer buying power seems to be easing, business activity is perking up and combined with improving small business sentiment, we could see more robust job growth and improving capital expenditures. Improving private sector activity is boosting the fortunes of many state and local governments. After several years of contraction, we could experience incremental growth from our nation’s municipalities. Tax collections are certainly on the rebound. Collectively, municipal tax receipts have grown 3 percent over the last 12 months. That equates with 3-percent growth in government job openings.”

BIZTIMES: Which industry sectors are poised for robust growth in the second half of the year and why?

ABLIN: “Fueled by a relatively cheap dollar and natural gas, U.S. manufacturing is on the upswing. Improving conditions in Europe could help fuel export growth in the near term. In the meantime, the United States is the best place for manufacturing in the developed world. I think I rang a bell when I heard that Airbus, a French company owned by a consortium of European companies, announced plans to open a manufacturing facility in Alabama. The technology sector is poised to benefit as business spending increases both here and abroad. Businesses are all about being efficient and productive. Technology, through software, hardware and manufacturing innovations like 3-D printing and robotics, can help businesses do more with less.”

BIZTIMES: Which industry sectors are likely to be challenged in the second half of the year and why?

ABLIN: “Housing is the one area of the economy that’s not back to pre-recession levels. New home sales are currently running about 500,000 below where economists would expect, based on demographics, interest rates and economic growth. The culprit is household formations. The number of young people getting married and forming households is trailing demographic forecasts. Simply put, young people, those aged 24-35, are waiting to get married and they’re having fewer children than previous cohorts. High student loan balances and tepid job prospects are largely to blame. While the number of jobs available (is) improving, the types of jobs we’re creating–hospitality and health care–don’t offer the same income potential as the pre-recession positions, like construction. We estimate that the housing shortfall accounts for as many as 1.2 million ‘missing’ jobs in today’s economy. Time is on our side with this one. Eventually housing demand will pick up; though probably not in the second half of this year.”

BIZTIMES: What do you expect the U.S. stock market to do in the second half of the year?

ABLIN: “I expect the U.S. stock market to edge higher for the remainder of the year. At a 3- to 4-percent advance so far this year, we’re about halfway to my 2014 equity market forecast. I project the S&P 500 to close the year at 1,960, representing a 5.5-percent price return and 7.5 percent when dividends are included. Similarly, I projected the Dow to close the year at 17,500. We had a strong 2013, and we can’t forget that. Fueled by central bank liquidity, the S&P 500 returned nearly 30 percent, far outpacing fundamentals like revenues and earnings. While liquidity conditions remain robust, earnings and revenue growth need to catch up to investor expectations, based on current equity market values.”

BIZTIMES: Where is the smart money going (in the stock market)?

ABLIN: “Follow the money. That’s been the watch word guiding market performance for the last five years. Invest in markets where central banks are creating liquidity. Clearly, it’s worked for U.S. investing since the recovery, as the Federal Reserve pumped more than $3 trillion into our financial system. Now that the Fed is preparing to end (its) monetary expansion program, called Quantitative Easing, it appears that the European Central Bank is prepared to pick up the mantel. That suggests the next equity opportunity is in developed international markets, most notably Europe. The ECB is hell-bent on weakening the euro, and that makes sense. However, as foreign investors holding stocks denominated in euros, we need to take steps to insulate ourselves from potential currency erosion.”

BIZTIMES: Inflation has been tame. Part of the reason for that has been flat wages. Do you foresee any inflation in the near future?

ABLIN: “The Federal Reserve has been beating the inflation beehive with a stick for several years, hoping to spark stronger price growth. Higher inflation helps the Fed by creating a more stable economy that can be managed with traditional interest rate policy. The Fed has difficulty controlling the economy when inflation and interest rates are near zero. That’s because interest rates can’t go negative. If they did, savers would raid the banking system, preferring to hold cash under the mattress at zero interest. While we haven’t seen much inflation, it appears some inflation pressure is building. Labor conditions in some sectors are tight. Forty percent of employers surveyed can’t fill current job openings with qualified workers. Taking the long-term unemployed out of the equation for a minute, the unemployment rate is 4.9 percent. We expect to see wage pressure in certain skilled markets. Apartment rents are rising, suggesting housing costs are moving higher. It should be noted that housing costs account for roughly one-third of the (Consumer Price Index) calculation. We expect to see increased pricing pressure this year.”

BIZTIMES: What do you foresee for the national unemployment rate?

ABLIN: “The unemployment rate is falling steadily as more and more Americans are finding their way back to the jobs market. We expect employment conditions to improve and the unemployment rate to fall. I find it encouraging that the spread in unemployment rates between college-educated and high school-educated workers is falling. There’s no reason to think that America’s unemployment rate can’t slip below 6 percent this year. One thing working against the unemployment rate is how it’s calculated. The rate is a relationship between working Americans and those looking for work. Discouraged workers who stop looking aren’t figured in. That means the unemployment will tend to fall as Americans leave the workforce and rise when they return. I wouldn’t be unhappy if the unemployment rate rises incrementally later this year as more and more Americans return to the workforce.”

BIZTIMES: Would an increase in the minimum wage be a boost in the economy or a hindrance?

ABLIN: “I’ve done a lot of research on the minimum wage, and I do believe that a higher minimum wage would be a net positive and consistent with what the Fed is hoping to achieve. The minimum wage is not a living wage, and most minimum wage workers are not young people living at home. Most minimum wage workers are supporting households; either by themselves or with a working spouse. Many minimum wage recipients also receive government income support in the form of Welfare, SNAP (food stamps) and/or the earned income tax credit. Ramping up minimum wage would move more households closer to a living wage, not needing as much government support. The higher wage would have to come from somewhere though. The incremental expense would come from a combination of lower corporate profits, higher workplace productivity as employers would experience lower employee turnover, higher prices and incrementally higher unemployment. Let’s face it; the price of a Big Mac would go up.”

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