This year began with a chorus of optimism. The BizTimes Stock Index, which calculates the performance of publicly held companies based in southeastern Wisconsin, entered the New Year at 153.33 points, near a 52-week high. The presidential election had been decided with a clear victor, who was warmly embraced by business interests.
Economists were predicting the value of the U.S. dollar would fall in 2005, meaning American-made products would sell more cheaply overseas. That would be a real boost for American manufacturers and would be of special blessing to the Milwaukee area’s economy, which remains laden with factories.
Tax cuts would generate new growth and revenue for the U.S. economy.
So, what went wrong?
Six months later, the dollar has not fallen, meaning American-made products remain as expensive as ever, and imports from China are even more tempting. Energy prices are soaring. Interest rates are rising. Health care costs may have slowed, but they continue to rise. Inflation is inching upward. Wages and household incomes are stagnant, while credit card debts and bankruptcies are skyrocketing. The nation’s budget deficit and trade imbalance are at record highs. A housing bubble may be around the corner. The American automotive and airline industries are teetering. And a costly war in Iraq has no end in sight.
The result is a flat stock market and an uncertain economy with all kinds of mixed signals.
The BizTimes Stock Index, which was created by Small Business Times, with the help of North Shore Bank, reflects the region’s reliance on manufacturing. The Index has fallen 7.0 percent in the first six months of the year, which is much steeper than the drops in value for the Dow Jones Industrials Average (down 1.6 percent) and the Nasdaq Composite Index (down 4.0 percent).
Economists had projected slow growth in the U.S. gross domestic product (GDP) of 3 to 4 percent this year.
However, given the sluggish first half of the year, Bruce Bittles, chief investment strategist for Milwaukee-based Robert W. Baird & Co. Inc., is no longer donning bull horns as he peers into his crystal ball.
"Considering the weakening global business environment and worrisome imbalances in the U.S. economy, it is reasonable to assume the Fed will be increasingly reluctant to raise rates this summer," Bittles said in recent weekly report.
"Housing continues to be the principal support for the U.S. economy … Nevertheless, the U.S. economy is expected to slow in the second half of the year, due to record oil prices, flattening of the yield curve, the slowest real money supply growth in 10 years and a strong dollar. As a result, GDP growth for all of 2005 is expected to decline 3.0 to 3.5 percent," Bittles said.
Of the 35 companies represented in the BizTimes Stock Index, only 13 local stocks have gained ground so far in 2005 (see accompanying chart). Ten of those local companies on positive ground this year are manufacturers, two are financial service companies and one is a retail chain.
The top-performing local stock so far this year is that of Gehl Co., a West Bend-based manufacturer of compact construction and agricultural equipment. Gehl’s stock has skyrocketed 73 percent to $40.34 per share since Jan. 1.
Gehl’s construction equipment includes: Gehl and Mustang mini-excavators, mini-loaders and skid-steer loaders for material handling; Dynalift telescopic loaders; and Power Box asphalt pavers for building sidewalks, parking lots, trails and driveways. The firm’s agricultural equipment is used for haymaking, forage harvesting, manure spreading and feedmaking.
The company’s financial performance has been so solid that it has been added to the Russell 3000 Index, which is annually calculated to include the largest stocks on the market (by market capitalization).
Gehl recently reported record first quarter net sales of $119.0 million, and net income grew to $4.9 million, or 71 cents per share.
The growth enabled Gehl to refinance its debt with a new $125 million senior secured revolving credit facility. The company also boosted its 2005 forecast for net sales to $460 million, up from $440 million.
The only blip on Gehl’s radar screen is that its corporate leaders may be tipping their hands that the party is winding down. Gehl’s corporate insiders have been selling in recent months.
Chief executive officer William Gehl sold 15,000 shares, with a total value of $430,650, on April 28, less than two months after company president Malcom Moore had sold 74,467 shares, valued at $2.17 million.
If Gehl executives are losing faith about the prospects for the second half of the year, they are not alone.
Curiously, many southeastern Wisconsin companies remain optimistic about their own futures, but hesitant about the direction of the economy overall.
In the latest Metropolitan Milwaukee Association of Commerce (MMAC) survey of its members, the bullish optimism of local business executives is beginning to wear thin (see story on page 20). Although 71 percent of the members surveyed still foresee their real sales levels rising in the third quarter, that’s down from 82 percent who forecast such gains in the second quarter. MMAC members also are tempering their profit expectations for the second half of the year.
The waning optimism also is reflected in the second quarter TEC (The Executive Committee) confidence survey (see story on page 18). The index of CEOs’ overall confidence in the economy fell to 103.1 from 109.8 in the prior quarter, a decrease of 6 percent. By comparison, the second quarter confidence index a year ago was 111.9.
More than 2,000 CEOs of small and medium-
sized businesses throughout the United States, including Wisconsin, completed the TEC survey.
Meanwhile, Paul Kasriel, senior vice president and director of economic research at Northern Trust Corp., is leery of a housing bubble on the horizon. "Real estate brokers are teaming up with mortgage brokers, posing the question to the potential buyer: ‘What’s it gonna’ take to put you into this McMansion?’ So what if the amount you owe on the house keeps going up each month if the market value of your house keeps rising. And the market value can keep rising so long as exotic mortgage products can be created to allow subsequent potential buyers to keep bidding up the prices of homes. Oops! Better create some new exotic mortgage products because increases in the prices of new houses are slowing down significantly," Kasriel recently observed.
July 8, 2005, Small Business Times, Milwaukee, WI
No reason to panic
Economist says macroeconomic outlook could improve
The U.S. economy has gone through its share of ups and downs in the first half of 2005.
The housing market is still strong, but talks of a real estate bubble persist. Oil prices are skyrocketing, hurting manufacturing and the airline industry. The stock market has struggled, and the prices for raw materials, including steel, aluminum and lumber, are still high.
There is plenty to worry about, but no reason to panic, says Gary Thayer, vice president and chief economist of A.G. Edwards & Sons Inc., a St. Louis-based investing and financial advising firm.
Last December, Thayer was named the most accurate economic forecaster by MSNBC.com’s annual economic roundtable for his predictions of the 2004 annual inflation rate, year-end jobless and federal funds rates.
Thayer recently spoke in Milwaukee at an event presented by the Wisconsin Independent Business Association. He shared his outlook on the U.S. economy with Small Business Times reporter Eric Decker. The following are excerpts from that interview.
SBT: The U.S. economy in 2005 is a strange beast. We’ve got rising interest rates, rising fuel costs, a flat stock market and flat wages. Are we winning or losing?
Thayer: "I think we’re winning. We are seeing job growth better this year than we saw a couple years ago. That’s helping to give consumers more income. As a result, we’re seeing spending expand. We still have some problems in the economy. As long as we continue to see corporate profits good and businesses willing to hire, we’ll probably see additional job creation and income growth. So that’s helping the economy expand."
SBT: With rising interest rates and fuel costs, is inflation a real concern?
Thayer: "We’re not seeing a lot of inflation, but we are seeing more inflation than a couple years ago. We’re not seeing a lot of inflation problems, but unit labor costs are rising, commodity prices are up. There are some inflationary pressures out there. There is still a lot of slack in the economy, and there is still a lot of competition from overseas goods, so we’re not seeing a lot of inflation."
SBT: What will the stock market do in the second half of the year?
Thayer: "We’re kind of encouraged by what we’re seeing in the stock market right now. Although investors are very risk-averse right now, the underlying fundamentals are still pretty good. We look for the stock market to do a little bit better. But, there is a caveat. We’re also watching oil very closely. If we were to see oil retreat further, I think the potential gains to the market would be much better. If oil holds at high levels, it might be a struggle to move up, but probably still would move up."
SBT: What stock market sectors will be the strongest in the second half of the year?
Thayer: "Our equity strategy group is favoring things like health care, utilities, consumer staples and staying with energy until we see probably a significant change in tender."
SBT: What stock market sectors will be the weakest in the second half of the year?
Thayer: "We’re seeing some weakness in materials. With the Fed raising rates and the dollar getting a little stronger, some of the materials sectors of the stock market haven’t been performing well."
SBT: There’s been a lot of talk about a real estate bubble this year. Are we in a bubble, or is a bubble on its way?
Thayer: "I think what (Federal Reserve Chairman Alan) Greenspan has been saying about housing is probably accurate – that there is froth in the market, some markets we see are getting over-extended and somewhat speculative, but not nationally. It’s mostly West Coast and Florida, where there’s people buying second homes and trading up. A lot of the country is still just enjoying a good housing market because mortgage rates are down and jobs are being created. But we’re not seeing the type of excess speculating nationally that we’re seeing in the hot spots."
SBT: The U.S. dollar hasn’t fallen like many economists predicted this year. What’s the outlook for the dollar and what will the impact be in the second half of the year?
Thayer: "We think the dollar has the ability to move up gradually this year. We still have a big trade deficit, which is not helping sentiment for the dollar that much. But we are seeing the budget deficit narrow, and that is something that foreign investors might like to see. So there is some potential for the dollar to gain another 5 percent or so this year."
SBT: Wisconsin’s economy remains heavily weighted with manufacturing. Is that an advantage or a disadvantage in the second half of this year?
Thayer: "Manufacturing is the one area of the economy that has been particularly soft this year. There were many of the areas of the country that were relying on manufacturing that showed some weakness and right now particularly because of competition from overseas, because of problems with sales of some autos with gasoline prices so high, the trucks in particular are not selling well and the big SUVs. So, the manufacturing side that is tied to transportation is not going to do well until we clean up some of the excess inventory that has seemed to develop with the jump in energy prices. If we get some relief on energy, we do think that manufacturing is on a more level playing field here in the United States because the dollar has come down over the last three years. So there are still some good prospects for manufacturing, but we’re just in a very tough period right now."
SBT: How concerned are you about the U.S. trade deficit?
Thayer: "Our big concern about the trade deficit, of course, is that we lose a lot of jobs when we buy imports and don’t sell as many exports. We’ve been through a period of time here where the U.S. economy, I think, has fared better than some of the other economies around the world over the last few years, and that accounts for some of the fact that we’ve been buying more goods from overseas than foreign buyers have been buying of our goods. If this is just a temporary situation, and the rest of the world economy picks up over the next couple of years, we could stand to benefit, and the trade deficit could narrow. But we’ve got to see stronger growth overseas at this point to really change the picture."
SBT: Has NAFTA (North American Free Trade Agreement) been good for the U.S. economy?
Thayer: "NAFTA is, and most free trade agreements have been, designed to integrate world economies in an attempt to create more friendship around the world. The benefits of that are greater than just the trade. There’s less likelihood of conflict between countries when they are cooperating in trade. The problem is you get some benefits and some costs. It isn’t just the most recent NAFTA or anything – as our own country grew and became more economically integrated, the jobs went from the Northeast down to the Sun Belt, and now some of them moved to Mexico. And some of the jobs in Mexico are moving to Asia now. It’s a natural progression as new producers come online and are able to produce goods at a lower cost. And it helps the consumer again, but at the expense of some workers. The adjustment for the worker is very difficult, particularly if jobs are lost and communities suffer. You have to get a lot of retraining and work to get additional jobs in other areas to replace the lost jobs. It’s a very difficult process. The overall benefits of NAFTA outweigh the costs, but when we’re going through the change, the costs seem much more obvious than the benefits."
SBT: Are you a fan of CAFTA?
Thayer: "Again, I’m in favor of free trade agreements for spreading the prosperity and cooperating with other countries. I think there’s a greater risk in the world when you leave a community or a country behind and they are struggling economically when others are doing well. That creates animosity between peoples, and you can have a lot of hatred, as we’re seeing in parts of the world now, when you have people feeling they’ve been left out. I’m in favor of expanding trade and trying to increase the economic well-being of a lot of places around the world. But I realize that there’s a cost involved with that. That’s one that I think is in the nearterm a difficult cost to endure, but longer term, it’s a real benefit."
SBT: So, going into the second half of the year, are you a bull or a bear?
Thayer: "I’m optimistic. I guess I would be more bull than a bear. The economy has been through a soft spot here this year. Companies are watching their bottom line very closely, and they’re not spending excessively as we saw in the late 90s before Y2K. They’re not hiring excessively that would cause them to have their costs go up too fast. So I think we’re in a period of moderate growth that is pretty sustainable. And the slowdown that we saw earlier this year, I think was just an adjustment in the economy as we sort of cooled things off a bit to prevent inventories from becoming too heavy or excessive. We’re working our way through that, so I’m pretty optimistic as we get to the other side. I think the cooling off that we’ve seen recently is just temporary, and things could be a little bit better later in the year. I think the economy basically is going to get a second wind once we get through this soft spot."
July 8, 2005, Small Business Times, Milwaukee, WI
