Toby Madden - Regional Economist
Published January 1, 2009 | January 2009 issue
A vast majority of business leaders in the Ninth District expect a recession in the U.S. economy in 2009, according to the November fedgazette business outlook poll. This was evident across district states as well as across economic sectors. Leaders also have a pessimistic outlook for their own businesses and communities. One cause of the pessimism is credit conditions (see related articles in this issue). The outlook is the worst in the 18-year history of the poll. A small silver lining: Inflation concerns have moderated.
The outlook for local economies is dismal across most parts of the Ninth District. Respondents from all areas look for business investment, employment and consumer spending to drop in their communities. The severe downturn in housing starts is likely to continue, according to respondents. They see contraction in their own operations, as they expect decreasing employment and capital investment. Besides the overall economy, complying with government regulation is the main concern among responding business leaders.
Nearly 80 percent of the respondents foresee a recession in 2009. "Deep trouble," a Minnesota wholesaler commented. The average recession responses range from 63 percent in northwestern Wisconsin to 85 percent in the Minneapolis-St. Paul area. Meanwhile, the recession responses across sectors range from 72 percent of retailers to 92 percent of agricultural producers. However, a Minnesota manufacturer said, "The current situation is part of the economic cycle; the sky is not falling."
Respondents expect inflation to moderate in 2009. About one-quarter predict inflation of around 1 percent, and about a third predict roughly 2 percent. However, 20 percent look for inflation of 4 percent or higher. The finance, insurance and real estate sector foresees the lowest level of overall inflation. The lowest inflation predictions for 2009 come from South Dakota and Montana.
The majority of respondents—71 percent, the most in the poll's history—are pessimistic about their community's economic performance in 2009 (see chart). The pessimism is strongest in Minnesota, and Wisconsin respondents were in a similar mood. "Look for improvement in third quarter 2009," commented a professional service firm from western Wisconsin. South Dakota respondents were neutral, and North Dakota respondents were optimistic.
Across both geographic areas and economic sectors in the district, respondents predict significant declines in employment and business investment in their local economies. The weakness in employment may be holding down wage and salary increases. Forty percent of the respondents expect wages to be flat to up 1 percent in their communities in 2009. Most of the balance of respondents foresee wage increases of around 2 percent to 3 percent.
In addition, major decreases in consumer spending are predicted. A full 85 percent of the respondents look for consumers to spend less in their communities. The results are similar across the states, except for North Dakota, where 58 percent expect spending to decrease. Meanwhile, respondents from all the various economic sectors anticipate declines.
Housing starts are expected to decline again in 2009. "There is no need for additional space and housing," commented a Minnesota real estate professional. Throughout the district, 78 percent expect housing starts to fall in 2009.
Respondents are also pessimistic about their own firms. Overall sales revenue in 2009 is expected to fall from 2008 levels (see chart below). However, sales increases are anticipated by North Dakota and western Wisconsin respondents. Meanwhile, sales drops are expected for firms in the retail, construction and manufacturing sectors. "We see little business or retail expansion in 2009," said a Minnesota real estate developer.
Pricing pressure has moderated. About 30 percent of respondents expect to increase prices on their products and services, while 20 percent see price declines in 2009. The biggest declines are foreseen in the construction sector. About a third of the respondents from the services sector expect price increases, and 14 percent expect price decreases.
Meanwhile, company inputs are expected to drop sharply. "We will need to make significant cuts in full-time positions to survive 2009," a Minnesota manufacturer said. Thirty-seven percent of the respondents expect to cut employment in 2009, while only 15 percent expect to increase jobs. "We are concerned that employment cutbacks from companies like ours will deepen the recession," said a retailer from Minnesota. Investment in plant and equipment is also expected to drop, with 45 percent foreseeing decreased levels and 19 percent anticipating increased levels. Although inputs may decrease, productivity grew in 2008, as 65 percent of respondents reported increased levels of productivity.
In previous business polls, finding workers was the biggest challenge facing businesses. This year, that dubious honor went to complying with government regulation, with 78 percent of respondents citing it as a challenge in 2009.
Business Poll Results [xls]