Economic Outlook 2010

Various industry leaders from the region offer their perspectives on the year ahead

Story by Sean Fitzgerald

 AT THE CLOSE OF ONE OF THE WORST ECONOMIC YEARS in U.S. history since the Great Depression, businesses and consumers alike look forward to the rebound to come. But when that rebound will begin and at what pace recovery will occur remain speculative questions.

Employment

WHEN RECESSIONS FORCE EMPLOYERS to trim back on their workforce, there’s often a good deal of uncertainty down the road when the time comes to add staff once again.

For that reason, staffing agencies have become a common sense resource for employers to dip their toe in the water and test drive new staff to help with increased production without having to make the immediate commitment of bringing someone aboard fulltime with the additional costs of benefits, unemployment insurance and employer matches of Social Security and Medicare contributions. As a result, performance of staffing agencies has become a leading economic indicator of business hiring tendencies, and generally one that’s as much as six months out in front of other key signs of the economy’s performance.

The American Staffing Association national Staffing Index developed in 2006 hit an all-time low in January 2009 and nearly matched that low again this past July. In the five months since that time, the index had gradually ticked upwards to levels at the end of November 2008.

Kimberly-based Landmark Staffing Resources has experienced a similar resurgence, finding a steady uptick in hiring for administrative and professional positions since July, said Hans Schultz, director of business development for Landmark. Functions such as human resources, accounting and marketing were areas trimmed – or even shed altogether – by some smaller firms struggling to find measures to stay afloat at the end of 2008 and into 2009.

“This provides a quick resource for companies,” said Schultz, indicating an employer can hire a professional to help it restore its core disciplines flexibly without immediately committing to a new hire.

That’s particularly important when considering the nature of the current job pool. There is a greater number of people seeking work than in the past 50 years, and that means the number of applicants to any one job posting should be higher than any time in recent memory. But that doesn’t always mean the quality of choices has improved, or that employers have more of a guarantee they’ll find the person they want for the job, said Monica Vomastic, president and CEO of Landmark. 

“The job pool is good, but it’s not perfect,” Vomastic said.

Primarily, the job pool is tapped out of those with a medium-range of experience – those  who have been in their respective profession for 5 to 10 years – because that segment generally wasn’t included in recent workforce downsizes that usually first eliminated those with the least experience or those receiving the highest pay, Vomastic said. This middle-range experience group likes where they’re at, for the most part, and due to the current employment market, aren’t planning to leave their current positions anytime soon.

“Companies may need to take a closer look at candidates with less experience, or even from those who they may consider ‘over qualified,’” Schultz said.

Manufacturing firms working with Landmark have remained on a relatively even keel throughout the past few years, Schultz said, and therefore he doesn’t necessarily see an impending surge in requests for light industrial and assembly workers.

“Our (industrial) clients have been business as usual,” he said.

Additionally, Schultz said Landmark’s clients in northeast Wisconsin have remained particularly strong in health care and certain service-providing industries such as insurance.

So what’s ahead for 2010?

Those employers who’ve operated leaner because they were forced to do so may have discovered they can get by on fewer human resources, Vomastic said, if at least for the time being. That means it may be a slow climb to push unemployment figures back down below 5 percent in the New North.

“When there’s a recession, it creates innovation,” she said.

Manufacturing/paper

WISCONSIN’S PAPER INDUSTRY has had a rough first decade of the 21^st century.

Just nine years ago, employment at the state’s pulp and paper manufacturers totaled 54,000. Nearing the end of 2009, staffing levels in Wisconsin’s paper industry stood at 32,000 employees.

A decade of locally-grown paper companies selling off to multi-national paper conglomerates has meant local control has waned, capital investment had been curtailed, and in a handful of cases, paper mills had been shut down. In addition, global competition and arguably unfair foreign subsidies has driven price levels down to a point where it’s been challenging for Wisconsin papermakers to compete on an uneven playing field.

But the tide may be turning.

A brand new paper machine went online at Proctor & Gamble in Green Bay earlier in 2009, a major capital investment representative of a commitment to continue moving the state’s paper industry forward, said Jeff Landin, president of the Grand Chute-based Wisconsin Paper Council.

“We haven’t had a new paper machine go online in Wisconsin in decades,” Landin said. “These kinds of capital investments don’t happen too often.”

Likewise, certain regulatory changes are helping to level the playing field for Wisconsin’s papermakers, ensuring that all product is sold at a fair price. In early November, the U.S. International Trade Commission announced it would look into charges that China and Indonesia unfairly subsidized coated paper exports coming into the country, damaging sales for local employers like Appleton Coated and NewPage Corp. If the commission finds evidence of tampering with the market, it could impose trade sanctions on paper from those countries to make the market more equitable for all paper manufacturers.

“We can compete with anyone if the playing field is level,” said Landin.

In fact, officials at NewPage have argued they wouldn’t have had to cease production at its Kimberly mill if not for the coated paper dumping by Southeast Asian competitors.

Moving forward into 2010, Landin said most papermakers are evaluating a variety of opportunities for alternative energy production – which along with research dollars and tax credits from the federal stimulus package – are helping to create more revenue streams, minimize waste from the papermaking process, and make product as environmentally efficient as possible.

The industry has been closely watching the proposed cap-and-trade legislation in Congress, which Landin said would essentially penalize papermakers twice – first, for their own carbon emissions; and second, as the largest customer for most Wisconsin utilities, through increased energy costs.

“The climate change and global warming bills have the potential to be very, very harmful to the paper industry,” Landin said, indicating the cost of enacting such legislation could be “millions and millions of dollars.”

Overall, Landin said he expects employment in the paper industry to remain relatively static through 2010.

Finance

AS THE FINANCIAL MARKETS appeared to crumble beginning in late 2008 and into 2009, investors became more conservative and capital became more challenging to find.

A substantial amount of fraud, abuse and predatory practices discovered in the sub-prime lending industry lead to millions of mortgage defaults and home foreclosures nationwide because the industry compromised on generally accepted lending guidelines and provided home mortgages to many people not in a position to make good on those loans.

Northeast Wisconsin largely escaped this crisis, as most sub-prime lending occurred in Milwaukee County and many of the other large, metropolitan areas across the country, said Kurt Bauer, executive director of Wisconsin Banker Association. Bauer emphasized banks aren’t involved in sub-prime lending, and as a result, his membership escaped much of the first wave of home foreclosures attributed to the sub-prime lending crisis.

“But now we’re beginning to see a second wave of homeowners who are losing their jobs, losing their income and just can’t pay their mortgage,” said Bauer, noting these foreclosures are beginning to impact banks across the state.

Aiding the insulation of the region from the national home foreclosure trend was the fact that real estate experienced more mild fluctuation in value in northeast Wisconsin, said Eric Stone, vice president of Fond du Lac-based National Exchange Bank & Trust. More drastic price swings in other parts of the country left home owners buying at high prices, then finding that the value of the home had sunk far below the amount of their mortgage, in many cases.

“We didn’t have the rapid escalation of real estate values that other areas faced,” Stone said.

As a result of the crippling fallout from firms like Fannie Mae and Freddie Mac during the past 15 months, any institution lending money faces a tighter adherence to lending standards from auditors. At the same time, there’s simply fewer outlets for credit than there was a year ago when borrowing capital was infused into the market from shadow banking industry sources like Lehman Brothers, Bear Stearns, pension funds, hedge funds and even insurance carriers.

“In the boom times, everybody wanted to get into the banking industry,” Bauer said, noting that as of last year, traditional banks only accounted for about 25 percent of the nation’s lending market.

There is money to lend, though, and Bauer said Wisconsin banks are in a particularly strong position to make good loans to creditworthy homeowners and businesses. According to the most recent FDIC data available, Wisconsin banks held a 103 percent deposit-to-loan ratio during the second quarter of 2009, whereas the national average among banks was at 83 percent for the same period.

In fact, lending in Wisconsin did increase 2 percent during the first quarter of 2009 compared with its level a year earlier, according to FDIC data.

Challenges minimizing vacancy rates in the commercial real estate market – particularly among developers of non-owner occupied, multi-tenant facilities like retail centers or office complexes – has lead to a scenario where fewer banks are financing such projects until occupancy rates increase, added Michael Burch, president at National Exchange Bank & Trust. National Exchange is currently one of the state’s top-rated banks.

While National Exchange Bank hasn’t compromised any of its underwriting guidelines for loans, Burch acknowledges that commercial lending requirements for start up business have likely increased substantially for other financial institutions who may have made exceptions to their lending standards in the past.

Looking forward, banking officials don’t necessarily believe the economy will turn on like a light switch in the coming year, likening any improvement to a dimmer being turned up at a sluggish pace.

“I think we’re rather pessimistic. I hope that many of the positive economic forecasts coming out of Washington will have an effect in Wisconsin,” Bauer said.

Burch is cautiously looking forward to emerging from the recession.

“We think 2010 is still going to be a very tough year,” Burch said. “I think it’s going to be slow growth at best.”

Commercial real estate

IN PERHAPS ONE OF THE MORE  DEVASTATING sectors of the economy in the past year, commercial real estate values have plummeted considerably and non-owner occupied spaces are sitting empty with fewer tenants.

On Appleton’s west side, the office vacancy rate grew from 9.5 percent during the first quarter 2009 to just more than 15 percent by the third quarter, according to the Third Quarter 2009 Office Trends Report on Appleton from Grubb & Ellis/Pfefferle. In outlying areas of the Fox Cities, that office vacancy rate is as high as 22 percent, the report said.

In many cases, companies are seeking price concessions on the space they’re leasing at the time their existing lease comes up for renewal, according to the most recent Grubb & Ellis/Pfefferle report. With so many options available for similar space in the community at a more competitive price, tenants are holding the power to negotiate prices for office space.

“It’s definitely a tenant’s market for leasing, and it’s definitely a buyer’s market for buying,” said Tom Scharpf, an Oshkosh commercial property developer and a broker with First Weber Commercial-Schwab Realty in Oshkosh.

The office vacancy rate has held relatively steady throughout 2009, Scharpf observed, though he, too, acknowledged that lease prices are dropping in some buildings.

It is an opportune time to buy a property, Scharpf said, since depressed property values have lowered selling prices considerably. Scharpf said most of the commercial buy/sell transactions his office brokered during 2009 were sold below the appraised value of the property.

At the same time, new commercial development has been soft – partly due to the current number of vacancies in the market – and partly due to the more stringent challenges to acquire financing.

“If you want to put up a new building today, you’d better have at least 50 percent of it leased, and you better have the financial strength to support the other half,” Scharpf said.

Scharpf himself isn’t anticipating any new construction in the near future, though he’s kept the offices and suites at Highway 44 Business Place in Oshkosh relatively full throughout 2009. A separate property south of Oshkosh’s downtown has sat empty for nearly three years, though, and Scharpf said he’s recently made a decision to convert the 6,000-sq. ft. single office space into a multi-tenant building with individual tenant offices no larger than 1,000 square feet.

“We’re making a bet that we can fill that space more easily with smaller offices,” he said.

On the industrial side of the commercial real estate market, available space continues to be much more sparse, holding steady at about a 12 percent vacancy rate in the Fox Cities market during the 2^nd quarter of 2009, according to the most recently available Grubb & Ellis/Pfefferle report, and at an even lower level in Oshkosh.

Opposite from the employment staffing industry, commercial real estate trends as an economic indicator typically trail the economy by about six months.