Economic optimism is high, according to a new PNC survey of Michigan small- and mid-size business owners and executives. The numbers are approaching record-setting highs measured in fall 2018, when optimism was at 56 percent.
Nationally, 39 percent are optimistic about the national economy, while in 55 percent are optimistic about the prospects about their own companies.
Optimism for Michigan business leaders’ own companies was at 53 percent. Michigan business leaders’ views about local economies were positive with optimism reaching 41 percent, a level second to the record high of 45 percent a year ago. About 46 percent of respondents describe their outlook for the national economy as highly optimistic, a new high for the Michigan survey.
In turn, around 48 percent of Michigan small- and mid-sized business leaders expect their companies’ sales to increase, compared to 62 percent in fall 2018 and the record-breaking 63 percent in spring 2018. About 48 percent also expect their profits to increase, unchanged from fall 2018.
Respondent expectations for the next six months shifted from growth to stability regarding the businesses’ need for financing (81 percent compared to 66 percent in fall 2018), total cash flow (53 percent, up from 39 percent the year before), capital spending (64 percent, up from 49 percent) and cost of employee health care coverage (60 percent compared to 45 percent). Business leaders’ personal retirement savings have also shifted from growth to stability to 76 percent from 57 percent.
More than half – 53 percent – of Michigan small- and mid-size business owners and executives expect to pay higher prices to suppliers over the next six months, down from 59 percent a year ago. About 42 percent of respondents expect to raise prices they charge their customers, compared to 44 percent the previous year. Among businesses that expect to raise their prices, 58 percent expect increases of 3 percent or more, a drop from 70 percent of respondents the previous year.
Reasons for price increases include rising non-labor costs (37 percent), favorable market conditions that support such actions (31 percent), and rising labor costs (23 percent).
“Michigan’s economy will see slower growth in 2020 as job creation cools,” says Kurt Rankin, an economist with PNC. “Labor force participation in the state accelerated into the second half of 2019, but hiring trends have not kept up with that shift. The resulting workforce surplus should keep wage inflation pressures from accelerating further, after having outpaced the national average since mid-2018.”
Nationally, 53 percent of small- and mid-sized business owners and executives expect paying higher prices to suppliers over the next six months, and 42 percent anticipate increasing prices to customers.
In Michigan, about 21 percent of small- and mid-size business leaders plan to increase the number of full-time employees within the next six months, while those expecting to reduce the number of full-time employees remains at 5 percent, an increase from 3 percent in fall 2018.
About 52 percent say it’s harder to find qualified employees than it was six months to a year ago, up from 42 percent the year before. About 36 percent have increased wages or salaries, down from 43 percent in fall 2018. In addition, about 29 percent have allowed more flexible work arrangements, 21 percent have offered or increased bonuses, and 19 percent have increased benefits.
About 73 percent of Michigan small- and mid-size business leaders say a recession is unlikely and 22 percent say it’s likely before the end of 2019. However, the numbers increase for a recession in 2020, with 52 percent believing it is unlikely and 36 percent believing it is likely. Only 37 percent believe a recession is unlikely in 2021.
“Michigan’s economic growth looks set to weaken somewhat in 2020,” says Rankin. “The state will likely be hit disproportionately by a manufacturing-centered slowdown impacting much of the nation. Michigan’s payroll job growth already slowed to 0.4 percent in year-over-year terms in June, July, and August, the slowest since May 2010.
“Michigan continues to rely heavily on the auto industry, particularly in metro Detroit. Auto sales are expected to dip slightly in 2020, but projections remain relatively strong, despite the trade war with China and the recent UAW strike of General Motors Co. The housing market throughout the state will remain robust, with high prices and low inventory.”
Expectations for consumer prices are indicators of future inflation, and about 83 percent of respondents expect these prices to increase in the next 12 months. About 47 percent expect an increase up to two percent, up from fall 2018’s 30 percent believing the same thing. The portion expecting inflation of three percent or more is 36 percent, down from 48 percent the year before, with 23 percent expecting 3- to 4-percent inflation and 13 percent anticipating 5 percent or higher.
Nearly half – 45 percent – support increased tariffs, up from 36 percent the year before. More than a quarter – 26 percent – are against them, down from 33 percent in fall 2018. About 28 percent are uncertain, up from 27 percent.
About 39 percent expect an increase in supplier prices due to tariffs, and 49 percent do not expect an increase. About 11 percent don’t know or said it is too early to tell. About 34 percent anticipate passing on price increases to customers. About 52 percent believe tariffs will have no impact on their companies’ sales. Those who expect an impact are split – 20 percent expect an increase in sales and 11 percent expect sales to drop.
Most respondents – 86 percent – have made no changes to their business in response to tariffs. Among the 9 percent who have made changes, 2 percent made new investments or hired, and 7 percent delayed or cancelled investments or hiring as a results of tariff negotiations.
“Small- and mid-sized business owners in Michigan – many of whom have dealt with the restraints of a tight labor market for several years – can feel comfortable carrying their optimism regarding economic prospects into 2020, as slower national growth will not be compounded by rising labor costs,” says Rankin.