Banking & Finance, Economic Development, and Government

Report says optimism at peak levels

PNC survey shows about half the state’s small and midsize businesses expect six-month increases in sales, profits.

October 5, 2018
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Despite the escalating trade war, increased labor costs and a talent shortage, Michigan business owners have great expectations for the economy in the next six months.

Pittsburgh-based PNC Financial Services Group conducted phone interviews between July 9 and Sept. 13 — 150 of them with business owners and executives at small and midsize Michigan businesses — and published the data in its fall 2018 PNC Economic Outlook report Oct. 1.

The Michigan version of the semiannual report is in its seventh year and found optimism is running at “historic highs” in all categories evaluated by PNC:

  • 56 percent of survey respondents are optimistic about their own companies, a new high for PNC’s survey, compared to only 42 percent in its spring survey and 43 percent in fall 2017.

  • 45 percent are optimistic about the local economy, compared to 34 percent in spring 2018 and 28 percent in fall 2017.

  • 45 percent are optimistic about the national economy, compared to 37 percent in spring 2018 and 30 percent in fall 2017.

  • Expectations for increased sales are the second highest on record at 62 percent, just behind the 63 percent in the spring 2018 survey and ahead of the 56 percent recorded a year ago.

  • Nearly half (48 percent) of Michigan business leaders expect increased profits, down from spring 2018 (56 percent) and dropping marginally from fall 2017 (51 percent).

  • A “surprising” 16 percent expect tariffs to positively impact sales, while 15 percent expect the impact to be negative, 51 percent say it will have no impact, and 19 percent say it is too early to tell or they don’t know.

Kurt Rankin, PNC economist, said optimism about the economy and business growth is on par with his expectations.

“The state’s economy and the western half, more particularly Grand Rapids, is on a run of seemingly unwavering economic strength,” he said.

“Employment growth in Grand Rapids has been stronger than the state, Detroit, the Midwest and the national average for the last eight years solid. It’s slowed from an average of 3 percent to 2 percent, but it’s still high.”

He said despite the nation’s slowing labor and stock markets, Michigan has maintained its pace of growth, and it’s reflected in the confidence levels recorded in this survey and in consumer confidence surveys.

“As long as consumers are confident, they are spending money, and as long as they spend, businesses grow,” Rankin said.

Luis Quintero, CEO at Grand Rapids Auto Parts, responded to the PNC survey; his outlook about consumer spending is not so rosy.

“People are not spending as much as before; they are holding onto their money and not investing (in their cars),” he said. “They are afraid to spend money.”

Quintero said he is pessimistic about the national economy and moderately optimistic about the local economy, especially his neighborhood of Zeeland. He said he has lived on the lakeshore for 19 years, “and it’s growing like crazy.”

In terms of his own business, though, Quintero faces stiff competition from bigger companies.

“I had to make a few changes to make it grow,” he said. “Overall, we’re doing OK. As any business owner, we are facing competition. But we’re making enough to pay our bills.”

Quintero said he expects to see an increase in sales but no change in profits in the next six months.

As a result of U.S. tariffs, he expects to pay his suppliers more, which may necessitate increasing the prices of the goods he sells. He said it’s too early to tell what kind of impact tariffs will have on total sales.

Quintero said he does not plan to hire or increase compensation in the next six months and does not expect to implement changes to his business as a result of tax reform.

Norm Barlow, co-owner of Barlow Florist in Hastings, said he believes the economic outlook for businesses in the next six months will be “very good.”

“I think any business has to be very careful and not make major jumps as far as expansion, but I think it will be a slow and steady climb,” he said.

Barlow sources some of its floral supply from outside the U.S., so the business has seen an impact from the trade war. In some cases, that means paying more and raising prices to compensate, and in others, it means discontinuing some varieties of plants from its lineup that are now impossible to obtain.

Still, he said he doesn’t believe it will impact sales in a major way.

Barlow said if business does well in the next six months, he would consider hiring but does not plan to increase compensation for his existing two employees.

He does not plan to make changes in response to tax reform.

“The only thing that would affect my business is if they raise the minimum wage,” Barlow said.

Rankin said employees’ wages are rising nationally but not because of inflation.

“Inflation has remained at or below the key 2 percent level. The Federal Reserve targets that as … a healthy long-term rate,” he said. “It’s been below that year over year during the recovery but recently bumped against it. So, it’s not inflation in the cost of goods driving wages higher, although the costs of goods are rising. It’s more the labor market.”

Rankin said businesses are continuing to face difficulty finding qualified workers with experience in their industry, which spurs bidding wars against other employers in different fields for workers that will need to be retrained once hired.

“The ability to retrain a worker to the way you do business versus the way a competitor does will become important,” Rankin said. “Businesses want X number of years of experience and for a candidate to meet all these exacting standards. It’s unrealistic in this market.

“It becomes a problem for smaller businesses because they aren’t able to raise wages as high. But they would do well to offer as much in wage increases as they can now before the larger companies come in and start offering those wage bumps they can more easily and readily afford.”

Other survey results

According to the PNC survey, Michigan small and midsize business leaders have high expectations for wages:

  • 41 percent expect to increase wages (versus 42 percent in fall 2017), while the number planning to decrease workers’ wages is at a survey low of 1 percent.

  • Among business leaders planning to decrease or maintain wages, 64 percent point to wages that already are competitive for their industry and see no issues with employee turnover at current wages as deciding factors.

  • 72 percent of Michigan business leaders say they already have taken one or more actions to retain existing or to attract new employees: increasing wages/salaries (43 percent), offering or increasing bonuses (22 percent) and boosting benefits (19 percent); 29 percent have allowed more flexible work arrangements and 9 percent have relaxed hiring standards.

Tariffs

  • 37 percent of Michigan business leaders report currently selling or buying items/services from other countries to some extent.

  • 5 percent characterize the volume of that trade as “large.”

  • 36 percent are in support of tariffs (versus 39 percent in spring 2017) and 33 percent are opposed (versus 30 percent in spring 2017); 27 percent are uncertain.

  • 42 percent anticipate paying higher prices to suppliers because of tariffs.

  • 31 percent expect to increase prices they charge their customers should the U.S. impose increased tariffs on other countries’ goods, but 53 percent expect no impact.

Federal tax overhaul impact

  • 35 percent are familiar with the new tax law but uncertain how it will affect their business, similar to 37 percent in spring 2018.

  • 29 percent view the potential impact to their bottom line as positive, compared to 33 percent in spring 2018.

  • 40 percent still feel it is too early to tell or simply do not know what the impact will be.

  • 80 percent of business leaders have not made or do not expect to make any changes to their businesses as a result of tax reform, jumping from 70 percent in spring 2018.

  • 9 percent have made or anticipate making changes in response to the tax plan.

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