Economic and political factors are squeezing profit margins while hindering revenue growth at Minnesota companies, according to Twin Cities Business’ quarterly economic indicator survey of businesses across the state in late June.
Some 61 percent of the 587 leaders who responded say they expect to maintain current profit margins—the highest percentage of “staying the course” expressed in more than two years of conducting the survey. Previously, more respondents typically anticipated growing their profit margins, thereby allowing them to spend more on talent, capital expenditures, and research and development.
Holding back growth, respondents say, is a still sluggish economy, making it hard to significantly increase revenues, combined with higher costs due to federal and state tax increases and regulatory changes, a deepening shortage of qualified talent, and increasing difficulty in obtaining financing.
As a result, fewer business leaders are optimistic about Minnesota’s economy today (37 percent believe it will improve in the next three months, compared with 44 percent who shared such optimism last quarter), while more are pessimistic—20 percent believe it will worsen, versus only 16 percent three months ago. The percentage of leaders thinking pessimistically about the state’s economy has grown by a sizable 35 percent since one year ago.
Their sentiment about the state’s economy, as well as answers to other questions in the survey, are used to formulate the Minnesota Economic Outlook Index (see below), the only indicator of what business leaders across the state are planning for the immediate quarter. For the third quarter of 2013, the outlook index dropped to 48.6 from 50.8 three months earlier; an index above 50 indicates potential economic expansion; below signals contraction. The current score is down 10 percent from one year ago at this time, and is the weakest since the fourth quarter of 2011.
Some 36 percent of respondents say they expect finding qualified labor will be harder in the months ahead, the highest percentage since the survey began two years ago. “Over the last few years the employment pool, although great in numbers, has been lacking in people who want to ‘work.’ If there was a class that could teach today’s employees what ‘work ethic’ means, I think our companies would be rock-solid,” wrote one respondent to the question, “What do you anticipate as your biggest business challenge within the next three months?”
Health care reform is also making matters more difficult for some small employers: “Our biggest challenge will likely be finding and keeping qualified employees, and being able to offer them competitive wages and benefits. We are a small family-owned business, and we are not able to offer the extensive benefits packages that many larger companies are able to offer,” wrote one business leader.
Of even greater concern are recent developments on the national and state levels seen as harmful to profit margins. “A discouraged private sector that sees increased taxes and regulation on every front [is our greatest challenge],” wrote another respondent. “Our clients are not eager or excited to make new investments in their businesses, and without that impetus to drive commercial real estate needs, our company suffers.”
One respondent’s comments seemed to summarize widely held views: “Managing anticipated cost increases due to recent state and federal legislation. Expect revenues to remain steady or increase slightly, but expect operating profit margin to be negatively impacted.”
Other most-common answers to the “biggest challenge” question had to do with how to grow revenues, manage growth, and take on increasing competition with existing resources. Workforce productivity concerns surfaced, and for the first time in more than two years less than 50 percent of respondents anticipate an increase in employee productivity in the next three months.
The Twin Cities Business survey findings mirror expectations nationally. Companies have cut costs, along with other maneuvers to boost earnings while waiting for the economy to warm up enough to boost revenues once again. But it isn’t happening yet. Revenue at companies in the S&P 500 was expected to climb by only 1 percent in the second quarter, according to the Wall Street Journal.
Twin Cities Business conducts this survey quarterly to provide a look at business planning and sentiment among leaders across all industries in Minnesota. The survey looks at what companies plan to do in the upcoming quarter by way of hiring, capital expenditures, research and development, production levels, revenues, and earnings in the next quarter. It also asks what business leaders think about the ability to hire qualified employees, obtain financing, and about economic conditions in Minnesota, and globally. For the most recent survey, an email link to an online survey was sent to 16,313 Minnesota business leaders in mid-June, and a reminder email was sent the following week to those who had not yet completed the survey. The Minnesota Chamber of Commerce provided some of the email addresses used in this outreach. As of June 27, 587 businesses responded, resulting in a 3.6 percent net response rate. Of those who responded, 88.4 percent represented privately held businesses.