Thriving in a ‘Schizophrenic’ Economy

Last updated on May 13th, 2019 at 02:36 pm

The question was posed to members of the board of directors of the Milwaukee Council of Small Business Executives (COSBE): Do you expect a good year for your business in 2006? One by one, around the room, the executives checked in with positive outlooks about their respective companies:

  • "Our business is going gangbusters. It’s the best year we’ve ever had," said Karen Vernal, founder of Vernal Management Consultants LLC in Milwaukee.
  • "We’ve got the biggest backup of business in five years," said Gregg Eisenhardt, president of Good Electric Co. in Milwaukee.
  • "Our business is just absolutely going crazy. We’re very bullish," said Steven Balistreri, owner and president of Sun Cleaning Systems Inc. in Milwaukee.
  • "This year, we’ve had a record year," said David Kliber, president and chief executive officer of SF Analytical Laboratories Inc. in Milwaukee.
  • "We’re suddenly seeing a lot of pent-up demand," said Charles Engberg, founding partner of Engberg Anderson Design Partnership Inc. in Milwaukee.
  • "Our clients, up until the last quarter, were afraid to pull the trigger (on expenditures). Now, that’s starting to happen," said Gary Zimmerman, president of Creative Business Interiors Inc. in West Allis.

However, when the executives were asked a second question about whether they are confident about the economy, most said they are very concerned.

How can a room full of executives be so bullish about their own companies, but so squeamish about the direction of the overall economy?

Welcome to what several COSBE executives describe as a "schizophrenic" economy. Even though their outlooks for their individual businesses are rosy, most COSBE board members fear that an economic downturn is just around the corner.

"The basic underlying strengths of business are getting better, but long range, it’s not a pretty picture," said P. Michael Mahoney, president of Park Bank in Milwaukee.

"I have concerns about whether this kind of growth is sustainable," said Paul Sweeney, co-founder of P.S. Capital Partners LLC in Milwaukee.

Why are they concerned? After all, gross domestic product is up, unemployment is down and inflation is marginal. So, why are the concerned? Well, take your pick:

  • Soaring fuel costs.
  • Soaring costs for raw materials.
  • Wisconsin’s health care costs are still rising more than the national average.
  • A record $68.9 billion national trade deficit.
  • A record national budget deficit of more than $8.1 trillion.
  • Cheap foreign competition.
  • High taxes.
  • Bankruptcy cases filed in federal courts grew 10 percent in fiscal year 2005, according to the Administrative Office of the U.S. Courts, rising to the highest number of bankruptcies ever filed.
  • Record consumer credit card debt.
  • Rising interest rates.
  • A bursting housing bubble.
  • A distressed U.S. automotive industry.
  • A distressed U.S. airline industry.
  • The war in Iraq.
  • Terrorism.

"It really is schizophrenic," Vernal said. "Our business is going great, but the place I get conflicted is how is our community? The level of poverty. That’s where I get concerned."

"Wisconsin is a tax hell," said Noel Williams, founder of Williams Certified Public Accountants in Milwaukee. "And I don’t see (health care) costs lowering."

Paul Grunau, president of Oak Creek-based Grunau Co., draws a distinction between the 1990s dot-com boom, "which floated all boats," and the current economy, which has winners and losers.

"I think good management is really being rewarded more now," Grunau said. "After what happened in the 1990s, it’s like we’re waiting for the other shoe to drop. I think people are much more hesitant to say, ‘We’re really confident.’"

According to the latest Gallup poll, 63 percent of Americans rate the economy as only fair to poor, and by 58 to 36 percent, people say the economy is getting worse instead of better.

Tom Still, president of the Wisconsin Technology Council, says the economic rebound of the past couple years has been a "joyless" recovery.

"Workers and consumers are hedging their bets. The reason for pessimism may be relatively simple: The economic recovery has yet to affect their pocketbooks," Still said. "For many Americans, the rise in wages has not kept pace with inflation – particularly cost increases in energy and health care.

"Meanwhile, economists continue to debate the impact of the federal trade deficit with familiar arguments. Yes, America’s global trade agreements keep prices down because more products are being manufactured by cheap overseas labor. But is it a race to the bottom at the expense of the American middle class?" Still said.

Jack Davis, a New York industrialist and chairman of the Save American Jobs Association, said, "Elite academics and Wall Street wizards are finally beginning to see what the great majority of middle Americans have known all along: America cannot be prosperous and independent if we rely on foreign countries for our food, our clothing and our manufactured goods."

Michael Knetter, dean of the University of Wisconsin-Madison School of Business, cited two reasons for COSBE board members and other business executives to believe their own companies are in good shape, but the economy is not.

"One is that the media likes to alarm us about the economy. Second, there are some long-term problems that transcend economics and are proving very difficult for our political system to address. I think our inability to tackle these big problems is eroding our confidence," Knetter said.

"I suspect the schizophrenia is due in large part to the lack of educated and informed debate, and honest and bold leadership on important and correctable problems. Those qualities seem to be losing ground to simple partisanship. Let’s hope that is not a reflection of our society but just a run of bad luck," said Knetter, who served as senior staff economist for macroeconomic analysis for the President’s Council of Economic Advisors for former presidents George H.W. Bush and Bill Clinton and as a consultant to the International Monetary Fund.

"The trade balance is part of a larger economic picture that does not have a simple explanation. We only hear about one side of the coin because the alternative is complicated and because the full story would detract from the negative interpretation that is attached to a trade deficit. I believe that reporting bias may explain some of our schizophrenia," Knetter said.

"But some of our schizophrenia is probably grounded in reality. Recent developments and our policy responses in the areas of international relations, state and federal fiscal policies, and the global environment give us real cause to worry. I think these challenges, if not addressed soon, pose a real threat to our way of life," Knetter said. "You don’t have to be an expert in foreign affairs to see the risks in our current conflict in the Middle East and beyond with terrorist organizations and governments that are linked to them or that oppose Western values and institutions.

"Reasonable people disagree about how to approach these challenges, and there are serious risks associated with any policy. At a minimum, it seems we ought to pay more of the costs of our current policy with current tax dollars to test our commitment to the policy. But let’s not kid ourselves that some other approach would make this problem go away. We ought to worry about rogue governments and terrorist organizations, but there is no clear solution to those problems, because we do not have as much control on the outcome," Knetter said.

Knetter is worried about the future financial obligations of both the state and federal government.

"In addition to the large current operating deficit of the federal government, many governmental units have made unrealistic commitments to future benefits for their employees. These deficits and unfunded commitments are likely to lead households to consume ‘too much’ today and increase burdens on future taxpayers," Knetter said. "Our political system seems to be producing outcomes that increasingly value the present at the expense of the future, for some fairly obvious reasons. People ought to be nervous about this. We need a more honest and realistic fiscal policy."

Knetter also expressed concerns about the environmental impact as India and China become more industrialized.

"There is no doubt that economic development in western countries degraded rivers, oceans and the atmosphere. Can the planet handle what lies ahead as India and China go through that same process? Obviously, it depends on how these economies develop and how others adjust to it. But it is awfully hard to find reasons for optimism," Knetter said. "We have a serious incentive problem here as well: Individuals, companies and countries do not bear the full impact of their environmental decisions."

Knetter’s Quips

Michael Knetter, dean of the University of Wisconsin-Madison School of Business, offers the following economic predictions for 2006:

  • Gross Domestic Product – "I see 3.7 percent growth as we continue to see strong growth in productivity and expansionary fiscal policy driven by the war in Irag and post-Katrina reconstruction. (For those interested in boosting productivity in their organizations, we have a full array of open enrollment and custom executive education programs at the UW-Madison.)"
  • Interest rates – "An additional increase in short rates of 50 basis points under new Fed Chairman Ben Bernanke, with a smaller increase in long rates as he earns credibility as an inflation fighter."
  • The U.S. dollar – "Sideways."
  • Wages – "Total compensation will grow by about 3 percent in real terms (close to the growth in our productivity), but blue collar wages will grow less than white collar salaries due to changing supply and demand conditions. Wages and salaries will grow by less than total compensation because of the higher rate of growth in benefit costs relative to pay in total compensation."
  • Inflation – "The inflation rate stabilizes at this year’s rate of about 3.5 percent as commodity prices stabilize. The Economist commodity price index rose by 14 percent this past year, which drove much of the uptick in inflation this past year."
  • Unemployment rates – "I expect a continued slight drop to 4.6 percent by the end of 2006. The job market for UW business graduates looks to be very strong this year."
  • Industry sectors poised for growth – "Technology-producing, technology-adopting and R&D-intensive sectors will continue to grow."
  • Industry sectors poised to decline – "Automobile and related industries continue to contract as do other sectors that are intensive in unskilled labor."
  • The impact of the distressed U.S. automotive industry – "On a national scale, the impact is small, but it will have a more pronounced effect in this region due to the supplier network."
  • The Wisconsin economy – "We will continue to grow at close to the national average this year, but the strengthening of the dollar over the last year will be a slight drag on manufacturing and farm prices."
  • The stock market – "The Dow, the Nasdaq and S&P 500 should all grow at about 8 percent in 2006."

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