For this 13th installment of Crystal Ball, MiBiz reporters interviewed dozens of West Michigan executives about their outlook for the state and national economy and the indicators they’re watching as they prepare their businesses for the new year. While no single issue seemed to rise to the top this year, here’s a subjective list of their concerns that came up most often, ranked in no particular order.
As one saying goes, “Expansions don’t get tired; rather, they end due to policy mistakes.” Since Michigan is a state steeped in automotive and agriculture, two export-heavy industries, businesses here depend on Washington getting the policy right. Failure to pass the USMCA and reach a trade deal with China could send those businesses — and the economy — over the edge.
“One of the biggest things is the uncertainty involved. When you’re making a long-term investment, you really want to know what the rules are. Right now, companies just don’t know what the rules of the game are going to be, and that’s tricky. To some extent, that can matter even more than just the tariffs themselves.”
— Gabe Ehrlich, associate director of the University of Michigan Research Seminar in Quantitative Economics
2. Length of expansion/Fears of recession
The current economic expansion has gone on for longer than any other in modern U.S. history, which is causing executives to wonder how soon into the future the next recession will occur. Unfortunately, it’s often hard to predict when that next downturn is coming, as incorrect predictions about impending recessions over the last three years have proven.
“To look into the future, we have to look at the past. It’s like driving down the road at 90 miles per hour and looking in your rearview mirror. It works pretty well when the road is going straight, but when there’s a 90-degree turn, you might not see it.”
— Paul Isely, associate dean of the GVSU Seidman College of Business
3. Diversity, equity, inclusion
The face of West Michigan is changing and becoming less homogeneously white. Smart companies are grappling with ways to tap into a pool of employees and consumers who hail from a diversity of backgrounds.
“[W]e’ve realized that diverse teams have proven to have higher or more increased rates of productivity. We’ve also seen a diverse consumer base result in increased sales as well. Outside of it being trendy and outside of it being a buzzword, the true benefit to companies is you’re going to have increased sales, increased products, increased value, and more longevity as opposed to circling within the same market over and over again.”
— Graci Harkema, owner of Graci LLC
While the economy is much larger than the stock market, it can have an effect on consumer confidence, both positive and negative. As the market has become more reactionary in recent years, that’s led to large swings tied to news about tariffs and Federal Reserve decisions on interest rates.
“It would probably be unrealistic to assume volatility stays as low as it has recently been. Again, there’s a number of things on the horizon that have the potential to cause volatility, and I’m thinking about things like the presidential election, the ongoing impeachment discussion that could bleed into next year, a Brexit deadline of Jan. 31, and the ongoing trade negotiations between the U.S. and China. There are a lot of uncertainties out there that will evolve and proceed through 2020, and depending on how those things evolve, you could make a good case for why there could be more volatility next year than there was this year.”
— Nick Juhle, VP and director of investment research at Greenleaf Trust
5. Stalled business spending
More companies are taking a pause when it comes to capex, driven either by uncertainty related to trade deals and tariffs or by their place in the economic cycle. For its part, the Institute for Supply Management expects capex to decrease 2.1 percent among manufacturing companies in 2020.
“We’ve spent pretty heavily over the last six years, including a pretty substantial addition that we put on one of the buildings. So, we’re also kind of contracting. We’ve got a couple of things that are must-haves and we’ve got a couple of things lined up that have short payback periods, but it’s going to be over the next year or two. It’s going to be a pretty tight budget for our own capex spending.”
— Bob Roth, president and CEO at RoMan Manufacturing Inc.
6. Inability to shift any more health care costs to workers
Employers’ shift to high-deductible plans has hit a wall as employees have reached the limit of the burden they can assume. Experts say that’s forcing the industry to reexamine the payment model for health care and to look for new ways to ensure access.
“Everybody’s been looking for what the magic bullet is and we’ve gotten to the point in health care where so much of the cost has been transferred to consumers in the form of co-pays and deductibles and these high-deductible health plans, and that’s kind of run its course. That is not going to be an option going forward, yet we still have the cost of health care as a major issue.”
— Marianne Udow-Phillips, executive director of the Center for Healthcare Research & Transformation
7. ‘Normal’ is here
The economy on average grows around the 2 percent. Michigan, after years of stronger growth, is heading “back to trend,” according to economists. That slower growth has stoked fears that the economy could be weakening.
“It’s reasonable to expect slow and steady growth in the state, but we may be a little more vulnerable given our still higher relative exposure to the manufacturing and goods-based side of the economy. … We’ve had a pretty good run. Overall, we’ve performed relatively well versus other states.”
— Martin Lavelle, business economist at the Federal Reserve Bank of Chicago, Detroit branch
8. Consumers in control
Consumers need to stay confident, employed and spending for the economy to continue growing. The question remains: How long will their confidence stay at record highs and what will be the chain of events that causes them to retrench?
“What we are expecting, and often what we as economists are talking about, is when the next recession comes it will be consumer led. Consumers are about two-thirds of the economy. Right now consumer confidence is at an all-time high. … Consumers feel pretty good. They are concerned about trade and tariffs, they are concerned about lots of the uncertainty that business is thinking about, but we do continue to see this being strong. As long as they’re strong and they believe in the economy, we’re probably going to be OK.”
— Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research
The labor market in Michigan continues to be tight around major metro areas. Compounding the problem for employers in West Michigan is that labor participation rates are already higher than in other parts of the state, signaling that there’s no silver bullet left to solve the talent crunch.
“With our growth rate, we are hiring at all levels of the organization. … We are utilizing every resource we know in terms of staffing firms, recruiters, headhunters, websites, you name it, and we’re still struggling to find the talent.”
— Jim Medkser, president of Keystone Solutions Group
10. Politics/election year
The bitter partisan divide continues to permeate from Washington, D.C. through to the halls of the state Capitol in Lansing. An election year and a likely impeachment trial (and probable acquittal) will only make matters worse. Businesses have to operate within the policy framework government sets, and they need the pols to give them the framework and get out of the way.
“[P]eople just view Washington right now as a complete wasteland of trying to get anything done. There are a lot of big topics the candidates of course will always focus on, but I think the basic functionality of our federal government and our political process needs to be on top of those things they need to talk about because the biggest ideas they have are not going to go anywhere in the current atmosphere in Washington, regardless of the party.”
— Matt Resch, owner and president of Resch Strategies LLC