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2013: Where is the regional business sentiment trending?
First, let’s consider the past 12 months. The main themes we’ve observed include the full return of manufacturing, the “convergence” of residential real estate and the “great wait and see.” Manufacturing returned with full vigor in 2012, with most companies polled reporting double-digit growth in profits. In-sourcing has played a major role in many of these recoveries as fall-out from the economic crisis has eliminated marginal competitors in many sectors and rising labor costs in Asia have caused several Tier Ones to source work back to the predictable United States. The big winner seems to be the automotive supplier base, but growth across diverse manufacturing and service-based businesses was also observed.
The residential real estate convergence refers to the rise in existing home prices in West Michigan to levels that make home building viable once again. It also relates to the relative affordability of home ownership as consistently low interest rates and rising rental rates make the prospect of buying a home more alluring. At The Bank of Holland alone, we experienced a 36 percent increase in residential construction lending in 2012. In the markets we track in West Michigan, home sales and average prices were up 15-20 percent and 7-9 percent, respectively.
As for the “great wait and see,” well, I suppose we’re still waiting. Throughout our interviews, the healthy optimism we witnessed was only dampened by uncertainty caused by the health care debate, the election and now the fiscal cliff negotiations. Hopefully, by the time this article prints, that will be resolved, as well.
The timing of this resolution is critical. Of the companies polled, more than 75 percent planned to hire new employees and/or invest in new equipment and facilities to support growth in 2013, but many were hesitant and still await a resolution. It’s important to note that these companies represent diverse industries, from various durable and consumer goods manufacturers to service businesses supporting health care, real estate, technology and financial services. Agriculture was also represented. While anecdotal, the responses have been broad-based.
Heading into 2013, you may notice a shift in tone. Here’s what we are preparing our business for:
- Manufacturing continues, but at a cautious pace. Many of our local businesses have international exposure, and the global risks cannot be ignored. The wildcard may be the emerging U.S. advantage related to the cost of energy for production. Those businesses able to capture market share may thrive, but others relying on economic growth are expected to slow. This is still a positive view, but tempered by global overhang.
- Residential construction continues to grow in 2013 as relative affordability, low existing home inventory and government assistance (low interest rates) drive activity. The Bank of Holland is planning for 10-15 percent growth in this space in 2013. Healthy, but not 2012 revisited.
- Urban development remains alive and well. Strong demand for downtown apartments has driven numerous in-fill redevelopment projects in downtown Grand Rapids, while new mixed-use construction projects anchor paths of growth to the north and south. We expect these projects will promote spin-off development as Grand Rapids continues to establish itself as an urban destination.
- Agriculture remains a key component of our economy, and West Michigan is well positioned in the region given its access to natural resources (irrigation). Many of these businesses are conservatively managed, and we expect many regional growers and processors to move past the climate-related issues of 2012 and report strong 2013 results.
While the overall tone is one of optimism, we do see softness in a number of areas heading into 2013 and have heard consistent calls for concern in client interviews. Specifically, West Michigan continues to struggle with talent attraction issues (high-skilled) and confusion related to the impact of the Affordable Care Act.
Our general concerns in terms of business sectors are relatively few. Second-tier retail and suburban apartments are on the radar screen for 2013. Retail (because it’s always a concern in lower-density areas in the age of the Internet) and suburban apartments may be the first victims of home affordability.
Our biggest concern in 2013, however, relates to what we call the “C&I (commercial and industrial) Bubble.” In the prolonged low-interest-rate environment, banks are awash in liquidity and are competing fiercely to put their cash to work in the form of loans. The result: historically low interest rates for businesses, with few strings attached. The primary beneficiary of this competition has been the manufacturing sector. The current environment resembles the real estate bubble of 2006-2007, and we all know how that ended. Our concern is that in the face of real economic headwinds abroad, a blip in the growth trajectory in the United States could cause another knee-jerk reaction across several industries among some of the banks.
It’s clear from our client interviews that businesses have fully emerged from the financial crisis of a few years ago as leaner, more productive companies. The only thing holding them back now is the inability to plan due to uncertainty in Washington. We believe that growth and investment will accelerate once that uncertainty is lifted. It is in this spirit that we hope and expect the West Michigan business community to drive growth in the region in 2013. Hopefully, Washington is listening.
Rob Dwortz is president and CEO of The Bank of Holland.