Toby Madden - Regional Economist
Published January 1, 2008 | January 2008 issue
Slower growth is expected for the overall economy in 2008, but business leaders anticipate faster growth in their own operations, according to the November fedgazette business outlook poll. Leaders expect the inflation rate to increase and national output to increase slowly.
The outlook for local economies varies greatly across the Ninth District states, with vast optimism in the Dakotas and Montana versus neutral feelings in the eastern part of the district. Local communities in the Dakotas see increased business investment and employment, while respondents from Minnesota, western Wisconsin and the Upper Peninsula of Michigan expect the opposite for their communities. Respondents from all geographic areas except the Dakotas expect consumer spending to decrease in 2008. The severe downturn in housing starts is expected to continue, negatively affecting profits for many companies. Respondents see expansion in their own operations and anticipate increasing sales, employment, capital investment and product prices. Finding workers and complying with government regulation concern many business leaders.
"I believe we will not go into recession, but it will be close," a Minnesota respondent from the service industry said. Sixty-three percent of the poll respondents expect real growth of 1 percent to 2 percent in U.S. gross domestic product in 2007, and 14 percent expect a recession. Respondents from the U.P. are the most pessimistic about national growth, with none expecting growth over 2 percent. Business leaders from the Dakotas and Montana predict the fastest national growth.
Respondents expect slightly higher inflation in 2008. "Increasing energy prices will continue to create cost pressures," said a Minnesota manufacturer. Over a third of all respondents predict consumer inflation of around 3 percent in 2007; however, 41 percent expect inflation of 4 percent or higher. The agriculture sector foresees the highest level of overall inflation; the retail sector the lowest. The highest inflation predictions for 2008 come from western Wisconsin and the U.P.
A North Dakota retailer noted that the "oil and energy boom, record yields and commodity prices, and a strong Canadian dollar" have boosted economies in the western part of the district. The majority of respondents from the Dakotas and Montana are optimistic about their community's economic performance in 2008. However, respondents from the rest of the district are almost evenly split between optimism and pessimism. A Minnesota respondent said the local economy will be hurt "because of energy prices and weakness in the U.S. dollar."
This geographic split also holds true for business investment and employment. Generally, the western part of the district expects increases in business investment and employment, while the eastern part expects decreases. For example, about half of the respondents the Dakotas predict increases in business investment, compared with 18 percent from the Minneapolis-St. Paul area. Although the majority of respondents from all areas of the district expect wage increases of around 2 percent to 3 percent, about a quarter of the western respondents expect 4 percent or greater wage increases in their communities.
In addition, consumer spending is expected to decline in all areas except the Dakotas. The biggest drops in consumer spending are seen by business leaders in western Wisconsin, where 61 percent forecast decreased levels, followed by about half of the Minnesota and U.P. leaders; less than 10 percent expect increases. South Dakota respondents are about evenly split on the direction of consumer spending. About half of the North Dakota poll respondents expect increased consumer spending, only about a quarter expect decreases.
Respondents from all areas of the district expect a decline in housing starts for their communities. Overall, a whopping 79 percent expect housing starts to fall in 2008. About 40 percent of business leaders expect the decrease in housing starts to negatively impact their sales revenue and profits, and about a quarter expect employment and business investment to be hurt.
Even with slow macroeconomic growth and the downturn in housing, business leaders plan to expand their companies in 2008. The strongest expansion in sales is expected in the retail, manufacturing and services sectors. A western Wisconsin manufacturer said that "2007 and 2008 include a large increase in international business, with a 92 percent revenue gain in 2007 and a projected 30 percent gain in 2008." The strongest sales growth is expected for companies in the Dakotas and the Minneapolis-St. Paul area. Meanwhile sales declines are expected in the U.P.
About half of the responding companies plan to increase prices on their products and services in 2008, while only 14 percent say they will lower prices. The price increases may reflect more buying power because of reduced foreign competition. The "declining U.S. dollar is helping our exports in the face of foreign competition," said a North Dakota respondent. The largest price increases are expected in the agricultural, retail and manufacturing sectors and in the western part of the district.
Business leaders expect a modest increase in capital investment and employment. About a third of the respondents expect increased investment in plant and equipment for their companies in 2008, compared with about a quarter that expect declining investment. Meanwhile, 34 percent expect to increase employment and 21 percent expect to decrease employment. The largest job gains are expected in the services and manufacturing sectors. Seventy-five percent of respondents reported increased productivity in 2007, while only 8 percent reported decreased productivity.
The biggest challenges facing businesses are securing workers and complying with government regulation. "We have been in such an incredibly tight labor market," a Montana manufacturer said. Over half of all respondents expect a challenging time finding workers. Leaders from the agricultural and retail sectors have the hardest time securing workers. About three-quarters of the Dakota respondents expect finding workers as a challenge or a serious challenge, compared with only 23 percent of the respondents from the U.P. About half of all respondents see government regulation as a challenge. The respondents from the finance, insurance and real estate sector expect the toughest government regulation. "Regulation by state and national government will hamper investment and growth seriously," said a financial services respondent from the U.P.
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