Banking & Finance, Economic Development, and Manufacturing

Report: Economic optimism is strong

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

November 8, 2019
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Despite pricing pressures, ongoing tariff concerns and cooling job creation, a new report shows optimism among Michigan’s small and midsize business owners remains strong.

Pittsburgh-based PNC Financial Services Group conducted phone interviews between July 1 and Aug. 23 — 150 of them with business owners and executives at small and midsize Michigan businesses — and published the data in its 2019 PNC Fall Economic Outlook report last month.

The Michigan version of the semiannual report — which measures sentiment for the next six months — is in its eighth year and found optimism levels “approaching” the record-setting highs PNC measured last fall, with:

  • 46% of respondents highly optimistic about the national economy, a new record high for the Michigan survey.

  • 41% of Michigan business leaders optimistic about the local economy, a level second only to the record high (45%) set a year ago.

  • Only 36% of respondents saying a recession is likely in 2020, with 53% saying a recession is unlikely. The recession outlook for 2021 is less rosy, however.

  • 48% of respondents expecting their company’s sales to increase over the next six months, a drop from the 62% who expected sales to increase in the fall 2018 survey.

  • 21% of Michigan small business leaders planning to increase the number of full-time employees over the next six months, compared to 23% in fall 2018 survey.

  • Michigan business leaders split on the impact of the U.S. tariff policy on supplier prices, with 39% expecting an increase and 49% not expecting an increase.

Kurt Rankin, a PNC economist, said the survey results represent “small shifts” in outlook over the past year and fall mostly in line with the state of the national economy.

PNC Chief Economist Augustine Faucher’s current forecast for the probability of a recession in the next 12 months (40%) is “a little more pessimistic” than the survey results of 36%, but it’s PNC’s belief that the recession will be mild, Rankin said. 

Either way, Michigan’s economy will see slower growth in 2020 “as job creation cools,” Rankin said.

He expects the state will experience a disproportionate impact from “a manufacturing-centered slowdown” across the U.S., as well as the effects from a dip in auto sales, the recent UAW strike of General Motors and the ongoing trade war with China.

Rankin forecasts the housing market throughout the state will remain strong, with high prices and low inventory.

Additionally, he believes the optimism of small and midsize business owners in Michigan about their economic prospects is justified heading into 2020, as slower national growth “will not be compounded by rising labor costs.”

“There’s not much that I think needs to be done to prepare for a slowdown in growth, considering that … in local markets throughout western Michigan especially, the unemployment rates are so exceptionally low, monetary policy has been loose for so long — meaning the ability for businesses to borrow at low costs with relatively little risk has been in place for the better part of the last decade — yet inflation, wage growth and the risks that normally come along with those expansionary policies have not materialized,” Rankin said.

“Although growth is slowing, taking on the analogy of a vehicle, it is more like taking your foot off the accelerator as opposed to applying the brakes. … There aren’t imbalances in the economy that suggest a bubble is about to pop that’s going to send the economy into a (significant) recession where businesses need to steady themselves and be able to absorb that punch.

“I don’t think businesses need to do anything other than business as usual. I’m assuming that they’ve got their own costs currently under control because that condition is not likely to change in one direction or another.”

Deb Smith Allan is owner of Motel Lakewood in Ludington and was one of the fall 2019 survey respondents. She described herself as “moderately optimistic” about the West Michigan economy and the state of her business. While unsure of what to expect from the national economy, she does not anticipate a recession within six months.

Allan does not expect any changes in sales, profits, customer prices, hiring or compensation over the next six months.

She does expect to see a slight rise in supplier prices in the next six months, but she said she believes that will impact her bottom line far less than Mother Nature, as the motel’s year-round cash flow depends on good weather for vacationers, deer hunters, fishermen, snowmobilers and more.

Chuck Pappalardo, owner of Kingsley House Bed & Breakfast Inn in Fennville, also took the PNC survey. He said he is reasonably optimistic about portions of the national economy, but segments of the region’s economy, such as agriculture and tourism, worry him. 

In his own industry, he sees bigger threats than a possible recession, ranging from competition from Airbnb; the market share owned by travel booking sites like Expedia and Booking.com and how it affects small businesses; and especially the threat of losing the Pure Michigan tourism promotion program due to Gov. Gretchen Whitmer’s 2020 budget line-item vetoes.

“If (Whitmer) takes the money from Pure Michigan and basically defunds that government office, you can watch over the next two years the entire west coast of Michigan go under from a tourism point of view. It’s been so helpful. ... Pure Michigan is gold to this state,” he said.

Pappalardo added his business depends on the health of the state’s other major industries, such as manufacturing, skilled trades and education, and it is also impacted by the statewide problem with crumbling roads and infrastructure.

Other survey results

Higher prices

According to the PNC survey, during the next six months:

  • 53% of Michigan small and midsize business owners anticipate paying higher prices to suppliers, compared to 59% a year ago.

  • 42% expect to raise prices they charge their customers, compared to 44% in fall 2018.

  • Among businesses that expect to raise prices, 58% anticipate increases of 3% or more (vs. 70% in fall 2018). Their reasons for price increases include rising nonlabor costs (37%), favorable market conditions that support such actions (31%) and rising labor costs (23%). Trade tariffs also were cited.

Retaining/attracting employees

  • 21% of respondents plan to increase the number of full-time employees within the next six months, and 5% expect to reduce the number of full-time employees, up from 3% in fall 2018.

  • 52% say it’s harder to find qualified employees than it was six months to a year ago, up from 42% in fall 2018. 

  • 36% have increased wages/salaries (vs. 43% in fall 2018). 

  • 29% have allowed more flexible work arrangements, 21% have offered or increased bonuses and 19% have increased benefits.

Recession

  • 73% of respondents say a recession is unlikely before the end of 2019, and 22% say it is likely.

  • 52% believe a recession is unlikely in 2020, while 36% believe it is likely. 

  • 37% believe a recession is unlikely in 2021, while 38% believe it is likely.

Inflation

  • 83% of respondents expect consumer prices (indicators of future inflation) to go up over the next 12 months.

  • 47% expect an increase up to 2% in the next 12 months, a greater share than fall 2018 (30%). 

  • 36% expect inflation of 3% or more in the next 12 months (vs. 48% in fall 2018), with 23% expecting 3%-4% inflation and 13% anticipating 5% or higher inflation in the next year.

Tariffs

  • 45% of respondents are in support of increased U.S. tariffs on goods from other countries even if it means retaliatory tariffs in response (vs. 36% in fall 2018).

  • 26% are against it, vs. 33% in fall 2018.

  • 28% are uncertain, vs. 27% in fall 2018.

  • 39% expect an increase in supplier prices because of U.S. tariff policy, while 49% do not expect an increase and 11% don’t know or feel it is too early to tell. 

  • 34% anticipate passing on price increases to customers as a result of tariffs.

  • 52% believe tariffs will have no impact on their company’s sales; however, those who expect an impact are split: 20% expect an increase in sales and 11% expect sales to drop.

  • 86% have made no changes to their business in response to tariffs. 

  • 9% have made changes in response to tariffs — 2% made new investments or hired, and 7% delayed or canceled investments or hiring.

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