Recovery with Peril

A wide swath of surveys and data collected by BizTimes is pointing toward a formidable economic recovery in southeastern Wisconsin in 2012, but that bullish forecast comes with an asterisk.

Businesses do not like uncertainty. Unfortunately, 2012 is loaded with uncertainties.

– Will President Barack Obama be re-elected?
– Will Obama’s health care reform plan withstand a U.S. Supreme Court review, and what will be the impact on health care costs?
– Will Wisconsin Gov. Scott Walker be recalled?
– Can the state reverse its five-month track record of declining private sector jobs?
– How will the Dodd-Frank Act be implemented?
– Will the European economy undergo a double dip recession?
– Will chaos in the Middle East cause gasoline prices to spike to more than $4.50 per gallon in the summer?
– Will the U.S. housing market begin to recover anytime soon, or will foreclosures and plummeting home prices continue to be the norm?

And these are just the uncertainties we know about. In 2012, uncertainty is the new norm. And while many businesses may be tempted to stand frozen until the dust settles, they do so at their own peril. That’s because other businesses may be gaining market share by boldly going forward.

This year’s BizTimes Economic Trends special report finds plenty of encouraging signs of economic strength for 2012. Most local companies are forecasting rising revenues and profits this year. Most local companies expect to maintain or increase their current staffing levels in the year ahead.

The speakers at the Northern Trust Economic Trends Breakfast shared their insights about the year ahead on Jan. 20. Their thoughts also are captured in this special report.

As usual, we begin with a macroeconomic discussion with Michael Knetter, Ph.D., an economist and president of the University of Wisconsin Foundation. Knetter served as a senior staff economist for the Council of Economic Advisors for former Presidents George H.W. Bush and Bill Clinton. The following are excerpts from our annual interview with Knetter.

BizTimes: Let’s bottom-line this. Will the economy grow in 2012 and why or why not?

Knetter: “I believe the likely outcome is that the economy will see continued positive growth in 2012, possibly accelerating a bit, to maybe 3 percent growth for the year. But my expectations for the year ahead have much greater variance in possible outcomes because there remain real risks of another financial crisis. People have come to question the creditworthiness of various national governments to different degrees. Once we cross the bridge of thinking Greece, Italy, France and the U.S. may be poor credit risks due to long-term fiscal imbalances, it is hard to predict how markets might behave. As we learned in 2008, when markets conclude the credit of a given institution is no longer good, it can be too late to fix the problem. We still have some ugly scenarios that could materialize, but I hope we will forestall them through better choices.”

BizTimes: Large corporations continue to have strong profits, yet they are hoarding their cash. What needs to happen to get them off the sidelines?

Knetter: “Firms are actually investing at a high rate in equipment – from tools to tractors to technology and software – which is the type of investment often associated with accelerating recovery. This increase in equipment spending has not offset the decline in investment in structures due to overbuilding in the recent boom. In order to invest more rather than hoard cash, corporations need to feel more confident about the future in the following areas: (1) More confidence and trust that the global financial system is healthy; (2) More confidence that the U.S. government is taking action to improve its long-term fiscal position; and (3) Less uncertainty about particular public policies that have big cost implications such as health care, financial market policies and taxes generally. Greater uncertainty in all these areas leads firms to hoard cash to survive potential financial dislocations and discourages long-term investments due to inability to reliably estimate returns.”

BizTimes: As the information age took hold, the conventional wisdom was that Wisconsin was at a competitive disadvantage because so much of its economy was based on agriculture and manufacturing. And yet those were two of the strongest sectors of Wisconsin’s economy in 2011. In the end, they have turned out to be assets, rather than liabilities. Could you speak to that? And what about 2012?

Knetter: “We do remain disproportionately large in manufacturing and agriculture. Those sectors have indeed performed well in Wisconsin in the past year and indeed for decades, which is why they remain larger here than they do in other states. That said, it is hard to imagine that they will continue to outperform the newer emerging sectors for extended periods of time. Hats off to our firms in these sectors. They have done well, and I think the recent rebound in part reflects the sustained weaker value of the dollar over the past several years. That weakness helps firms that export or compete with imports, and it has aided us of late.”

BizTimes: What sectors of the economy are poised for growth in 2012 and why?

Knetter: “Because the weaker dollar affects trade flows with some lag, I believe that our tradable sectors of manufacturing and agriculture may do well again this year. I also believe that knowledge-intensive companies and biotechnology will be areas of growth.”

BizTimes: What sectors of the economy are poised for contraction in 2012 and why?

Knetter: “The paper industry, particularly printing and writing papers, have faced headwinds for decades due to increased electronic communication. That is likely to continue.”

BizTimes: Are you as bullish about the American automotive industry as some people appear to be?

Knetter: “I think if oil and gas prices remain high for a sustained period, we could become very competitive in some segments of the auto industry that rely on new energy technology. Whether prices remain high enough here to stimulate that investment and production is unclear.”

BizTimes: What is your outlook for inflation?

Knetter: “I see little inflationary pressure, as long as we have so much slack in our economy and the dollar is now stabilizing against major currencies.”

BizTimes: What is your outlook for the value of the U.S. dollar?

Knetter: “It seems to be firming against the Euro and stable otherwise.”

BizTimes: The national unemployment rate is down to 8.5 percent. What do you expect the rate to do in 2012?

Knetter: “I expect continued gradual decline to under 8 percent by year-end, provided there is no new financial crisis.”

BizTimes: How much will the Wisconsin economy be affected the European economy?

Knetter: “The entire U.S. economy would be affected by any major adverse development for the euro and European sovereign debt.”

BizTimes: Wisconsin has lost jobs for the past five months. How can that trend be turned around?

Knetter: “We are not a state with a high rate of growth in its workforce. The only way to attract more jobs to Wisconsin is to have more firms locate here with jobs that people will find acceptable that would lead some people who choose not to work now to re-enter the workforce or lead other people to move to Wisconsin. I’m less concerned about whether we grow the number of jobs and more concerned that we improve the quality of jobs we can offer for the people we have here. It will not be easy for us to become a high population growth state because of climate and other factors.”

BizTimes: You are a Hodag, the pride of Rhinelander. Early last January, we could not have foreseen the political turmoil that would follow in this state. A year later, what do you make of it all? Where are we going? Can these wounds and divisions ever be healed or bridged, or are we doomed to a state of perpetual chaos?

Knetter: “Well, I am a Hodag. That we can agree on. Wisconsin is facing the same vexing problems that bedevil other states and nations: a deep recession and slow recovery, serious deterioration in fiscal conditions and resulting difficult choices about which public programs to cut and which taxes to raise, and rising income inequality.

“Our political system has not done well in generating solutions to these problems, even in some instances where many economists and average citizens can see the solution plain as day. Given increased life spans and higher costs for higher quality health care, it seems obvious we need to increase the retirement age or reduce the benefits per year that we offer to retirees. This should be easy to do if it is phased in gradually with lead time. But we cannot even agree to do that. Worse yet, raising it as an issue is hazardous to your future as a politician.

“Are we doomed to this kind of politics forever? Let’s hope not. But I worry we might be because of the way government spending has changed over time. I think that bipartisan agreement comes easier for public expenditures on infrastructure projects. Fifty years ago, such expenditures made up a much larger share of public spending. Today, transfer payments dominate public spending. Transfer payments are inherently more divisive in my opinion because the benefits fall to a narrowly defined set of people, and the taxes are increasingly paid by a smaller fraction of the population who feel that they will not be significant beneficiaries of these programs.

“As a result, our political equilibrium has become more starkly divided, in my opinion. I hope I am wrong in my hypothesis, because if I am right, it is not easy to see how the divisive environment improves, absent some heroic and honest leadership. That’s one of my wishes for the new year.”

Sign up for BizTimes Daily Alerts

Stay up-to-date on the people, companies and issues that impact business in Milwaukee and Southeast Wisconsin

No posts to display