Perhaps at no time in recent memory have the health and the direction of Wisconsin’s economy been more shrouded in contradictions
and uncertainty.
In the late 1990s, the Tech Boom was in full force, the stock market rose to unprecedented levels, productivity improved and the economy was roaring by almost any measure. In contrast, the first three years of the Bush administration were indisputably mired in economic contraction.
So, where does that leave us today, and where are we headed? You can make a case that the economy is turning around:
— 63 of 72 Wisconsin counties reported lower unemployment rates in May 2004 than May 2003, according to the Wisconsin Department of Workforce Development.
Â¥ 60.6 percent of employers surveyed by Wisconsin Manufacturers & Commerce expect to increase employment in the next 12 months, and 64.7 percent expect moderate growth in their companies over the next six to 12 months.
— Wisconsin employers added 12,100 new jobs in May, when the state unemployment rate dipped to 5.1 percent from 5.8 percent in July 2003.
— 87 percent of Wisconsin manufacturers surveyed by The Paranet Group expect sales to increase in 2004 from the previous year’s levels.
— 88 percent of the nation’s largest employers expect their companies’ sales to increase in the next six months, according to a recent survey by The Business Roundtable.
— The value of signed construction contracts in southeastern Wisconsin increased 51.4 percent to $208.6 million in March from the same period a year earlier, according to F.W. Dodge.
— Air passenger totals at General Mitchell International Airport in Milwaukee rose to a record 644,603 in March.
— After a loss of 87,000 manufacturing jobs in Wisconsin since 2000, the state’s manufacturers added 1,500 jobs in the first quarter of 2004, according to the Wisconsin Department of Revenue. The state’s manufacturers are expected to add 21,000 jobs by the end of 2006.
— Personal income in Wisconsin is expected to increase 5.0 percent in 2004, 4.8 percent in 2005 and 5.5 percent in 2006, according to the Wisconsin Department of Revenue.
— The BizTimes Stock Index, a weighted indicator of the stock values of publicly traded companies based in southeastern Wisconsin, rose to 145.89 June 25, its highest level since the index historically tracked local stocks in January 2000.
However, before you pop the cork from the champagne bottle and toast our better tomorrows, take a deep breath and consider:
— The Bush administration predicted its "Jobs & Growth" tax cut would add 3.4 million jobs, but it has only added 1.4 million jobs so far. Detractors of the president are questioning how many of those new jobs created are paying family-supporting wages or providing health care benefits.
— The average length of Americans in unemployment rose to 20 weeks in June, up from 19.7 weeks in the previous month.
— U.S. orders for durable goods unexpectedly dropped for the second consecutive month in May, suggesting a rise in corporate spending may be stalling. Meanwhile, the costs for raw materials continue to rise.
— 76.5 percent of employers surveyed by Wisconsin Manufacturers & Commerce say their employee health insurance coverage costs have increased 11 to 30 percent in the past year. According to the survey, 81.3 percent of the employers say they intend react to the increases by raising employee contributions for insurance costs, thereby crimping the disposable income of consumers in the state.
— According to the WMC survey, 62.5 percent of the employers say they do not plan to expand their business in Wisconsin in the next year or two, while 61.8 percent say they plan to expand in another state or country in the same period.
— The share of employers surveyed by the Metropolitan Milwaukee Association of Commerce who are predicting rising sales levels in the third quarter dipped four percentage points from the same period a year ago. The percentage of MMAC employers predicting calendar year employment gains also dipped four percentage points from the same period a year earlier.
— Only 22 percent of Americans believe they will have enough money to pay for basic expenses – food, shelter, and clothing – during retirement, according to the Principal Financial Group’s Global Financial Well-Being Study.
— Only 30 percent of U.S. employers plan to add to their payrolls in the third quarter, according to the latest Manpower Employment Outlook Survey.
— The number of mortgages recorded in Milwaukee County has fallen 33.3 percent from year-ago levels.
— Wisconsin ranked dead last among the 50 states and Washington, D.C., for wealth preservation in retirement and 50th in overall "wealth friendliness," according to a recent Bloomberg Wealth Manager study.
Then you toss in the all-time high national debt, a record U.S. trade deficit and the uncertainty over Bush’s War on Terrorism, and the outlook is murky, at best.
So, is Wisconsin’s glass half-empty or half-full? The reality may be too complex for that simple axiom. The truth is, some glasses are full, and others are going bone dry.
To sort out the big picture, Small Business Times sought insight from Maureen Busby Oster, chartered financial analyst and president of MBO Cleary Advisors Inc. in Milwaukee. The following are excerpts from that interview.
SBT: The Federal Reserve is raising interest rates. The only questions are how much, how often and then what?
Oster: "The critical question is then what? The general expectations are maybe a raise of another quarter-point in August, and then not another one until after the election. The futures market for what the Fed rate is supposed to be is that nine months out, it will be roughly in the 3 percent range. That’s a lot farther than we are now. That would imply a lot more in the way of increases. So, there’s a ways to go, however you want to look at it, in terms of rates going up. The bond market has already anticipated this. People don’t wait for the fact. The bond market and stock market are both discounting mechanisms."
SBT: So the impact of these rising interest rates …
Oster: "Is already being built into investor expectations. The other thing to remember is that businesses restructured their balance sheets. Took a lot of bank loans and did refinancing. And of course, we all know that consumers restructured their balance sheets, the whole mortgage refinancing activity, etc. Only about 20 percent of consumer debt is at a floating rate."
SBT: For a privately held company that hasn’t restructured its debt, now is the last chance, because interest rates are only going up from here, correct?
Oster: "Yes. Its bank debt is going to cost it more money. The other thing is, if you are in a housing-related business that benefits from people moving, you might be affected by people not moving, because they have to give up their fixed-rate mortgage to get a higher-cost mortgage. So, housing-related businesses, which have done extremely well for a number of years, especially businesses that benefit from people moving, are likely to be negatively affected. On the other hand, if you haven’t already renovated your existing house, and you can’t afford to move anymore, then you might fix up what you’ve got.
"The cost of borrowing is going up, and the biggest borrower that we know about these days is the federal government. So, its interest costs are going to go up. So much of the federal government’s debt has been bought up by governments of other countries. They may be less inclined to buy those large amounts of debt, and that would put downward pressure on the dollar.
"Now, the flip side of the downward pressure on the dollar is that makes U.S. goods more attractive to foreigners, so it could help U.S. export demand. On the other hand, if you’re a company that has just moved your production to China, you might stop for a moment."
SBT: So a falling dollar may not stop, but it may flatten out the outsourcing of U.S. jobs to China?
Oster: "That’s correct."
SBT: There also are other positive impacts to rising interest rates, aren’t there?
Oster: "The positive impact is that your money market account is going to pay you more. So, particularly if you’re looking at any kind cash, cash equivalent, bank deposits, money market, you could have more income. And certainly for older people, who have been living on fixed incomes but have lots of money market balances, things should get better. If you are a business and you have a defined benefits plan, your future liabilities will be less onerous in a higher interest rate environment, because you will have a higher rate at which to discount those future liabilities."
SBT: When you see that the U.S. trade deficit with China is at an all-time high, do you cringe and think that will be a long-term problem that needs to be addressed, or do you say, "What ever?"
Oster: "We’re buying things from foreign markets because we can buy them at cheaper prices than we can make them here. That’s kept consumer inflation low. Shoes and apparel. The way we have kept inflation very low because we have been able to import things made elsewhere at lower costs. I personally think that’s good in the long run. As people’s lives improve around the world, they get a better education, they have a better standard of living."
SBT: There would be critics who would say the wealth in a country like China in fact is not being shared with the people, that it isn’t becoming a consumer nation.
Oster: "Oh my Gosh. One of
the biggest gross markets in the world is China."
SBT: Right, but there are people working in shops over there who are making things that they themselves can’t afford to buy, because their wages have not grown with the growth of China’s overall economy, so they are not consumers, and they can’t consume goods made in America. It’s an unfair equation.
Oster: "I guess I would say they are people that, No. 1, are willing to work for that (wage), and No. 2, they’re making more than they were making before. Nothing is perfect. Anybody who thinks that it is is very unrealistic. The Chinese have the people moving from the farms to the factory, not unlike this country 100 years ago. They’re getting things now that we take for granted … in-home toilets, electricity. Nowhere in the world is there hot water on demand except in this country.
"I’m not saying it’s equitable, by any means. Certainly there are some truly tragic situations, particularly in places like a lot of Africa. But I would say on average, open markets and globalization has been a plus. It has allowed us to continue to improve our standard of living and has kept our inflation under wraps. And it has required that people be re-educated, if you will."
SBT: The old argument was that American factory workers were losing their jobs, but that’s just evolution, so they just need to be re-educated to enter the high-tech economy. Well, now, those high-tech jobs are also being sent overseas to places like India. So, what are these Americans supposed to be re-educated to do? Where will their next jobs be?
Oster: "The growth of demands for jobs in the future are in education, health care. There will always be needs in service sectors, but what the service is can change dramatically. We don’t make the machine that necessarily makes the computer chip, but we still are making the most innovative work in applying technology in this country. Are we losing some of our competitive advantage? Yes, because we don’t educate as many scientists. But if you look at sectors, look at Rockwell Automation, how they’ve reinvented themselves."
SBT: In our BizTimes Stock Index, eight of the top 10 performing publicly held companies in southeastern Wisconsin so far this year are manufacturers. They manufacture something. What do you make of that?
Oster: "We are a manufacturing area. If you look at something like this index in New England, it would be financial services and technology companies. We are manufacturers here. That has been our heritage. And that is a challenge. Having good machine tool operators. Now, what they do changes. They’re serving niche markets."
SBT: Finally, what about the national debt, which appears to be on track for a record?
Oster: "It’s up for a number of reasons. It’s up because we cut taxes. It’s up because the war effort is costing more. The costs related to the whole terrorism issue are just related to the costs of doing business. I stand in line at the airport. It reduces my productivity, because I have to leave sooner, so that I can stand in line and take my shoes off and take my computer out of its bag. But we do that."
July 9, 2004, Small Business Times, Milwaukee, WI
