Minnesota appears to be on the verge of entering a recession, according to TCB’s Quarterly Economic Indicator (QEI) study looking at business leaders’ plans in the quarter ahead, in this case, the third quarter ending Sept. 30.

If findings from the most recent QEI survey—completed by 228 business leaders from around the state in late June—are as accurate as previous quarters’ reports, businesses here will have experienced two or more consecutive quarters of reduced production levels, revenues and earnings by Oct. 1. This will follow three or more consecutive quarters of reduced capital expenditures and R&D activity.

Meanwhile, trailing-indicator reports through June from other sources find the national economy has begun to slow as well. Corporate profits have been declining on a year-to-year basis since late last year. Overall industrial production on a year-to-year basis has declined for the past nine months. And hiring is slowing, auto sales are slipping and business investment is dropping, according to a Wall Street Journal survey of economists.

Pessimism about the economy, in Minnesota as well as elsewhere, has reached a five-year high. The percentage of respondents expecting economic conditions in this state to weaken in the months ahead has increased in the past seven consecutive quarters and now stands at 31 percent, more than double from one year ago at this time. The percentage of those expecting conditions to improve (41 percent) also has slipped for seven consecutive quarters. These are the highest and lowest levels, respectively, recorded since TCB began conducting this survey in June 2011.

Respondents are even more pessimistic about business conditions nationwide and globally. Some 45 percent expect conditions to weaken between now and Sept. 30—up 80 percent from one year ago at this time. Only 10.6 percent expect conditions will improve.

As a result, Minnesota employers plan to cut back on hiring, according to QEI survey participants. Only 32 percent say they plan to hire more people during the third quarter—the second-lowest level since the fourth quarter of 2011 and 17 percent less than in the third quarter of 2015; 12.3 percent say they plan to reduce employment levels. This is the highest

percentage of job-reduction planning reported since the QEI began five years ago, and a 112 percent increase from one year ago at this time. Capital expenditures, revenues and profits also are expected to slow during the third quarter compared with recent periods.

Capital expenditures, revenues and profits also are expected to slow during the third quarter compared with recent periods.

• Capital expenditure plans are now the weakest they have been in five years. The percentage of respondents who say they plan to increase spending in this area by Sept. 30 (28 percent) is down by 20 percent from a year ago at this time. Meanwhile, the percentage of respondents who plan to cut capital expenditures this quarter (15 percent) is up 34 percent from those who planned to cut back in the third quarter of 2015.
• While 54 percent of respondents one year ago anticipated revenue growth in the months ahead, only 32 percent think so heading into the third quarter of 2016. This represents a 40 percent drop. Some 13 percent of respondents expect revenues to slide. This is about the same as last quarter but remains the highest in this area since the fourth quarter of 2011.
• Operating profit margins are expected to drop, according to 19 percent of respondents; only 20 percent expect they’ll improve. This represents four consecutive quarters of such lowered expectations. For the biggest business challenge in the next three months, finding—and increasingly of concern, retaining—good employees topped the list among the 179 written responses. Other responses that represented common concerns included:
• “Overseas competition, finding qualified workers, remaining competitive with increased health care, insurance and workers compensation costs, high tax rates and workers’ demand for higher wages.”
• “The changing economy and political climate will cause the marketplace to be very unstable and companies will not invest until everything is stable.”
• “Continuing to align the right technology talent as part of our organization structure with our strategic plan to execute on behalf of our clients.”
• “Health care costs.”
• “Confidence. There is a real leadership void at the state and national level.”
• “Responding to government and insurance regulations.”

Another question was whether those businesses that plan to expand will do so in Minnesota. This quarter, 47 percent indicated they would, down from 57 percent one year ago at this time; 28 percent said they won’t, up from 22 percent last year; and 25 percent answered “unknown,” up from 21 percent a year ago.

TCB’s QEI added a new question this time around: “What is your company’s most significant driver of health care costs?” Overwhelmingly, the answers had to do with the age of their employees and high utilization rates.

The QEI also gives respondents a chance to mention issues not on the survey. Among them:

• “We see slight improvements, but the whole thing feels like it is on shaky ground.”
• “Anti-business government policies, overregulation and high, inefficient taxes have greatly slowed potential economic growth the last eight years.”
• “The Minneapolis business climate is becoming more difficult. Rising taxes, hard-to-find employees, expensive parking, increasing rents and now required sick leave.”
• The 2016 legislative session. Also SWLRT project is a black hole that is unnecessary and will not be even close to an economic necessity over the next 20 years. Minnesota’s current appetite for taxing and spending is, and will continue, driving higher income and wealthier folks out of the state.”
• “Is our political future business-friendly?”

METHODOLOGY

Twin Cities Business conducts its survey quarterly to provide a look at business planning and sentiment among leaders across all industries in Minnesota. An email link to an online survey was sent to more than 11,604 Minnesota business leaders in late June, and reminder emails were sent the following two weeks 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 July 1, 228 leaders responded, resulting in a 2.0 percent net response rate.

Above and at right, percentage of respondents anticipating increases or improvements in these areas during the second quarter of 2016—diffusion-indexed: For each question, all responses for “increase” added to one-half of responses for “maintain/stay the same.” Above 50 is positive, below is negative.

Percent of respondents, by county, that anticipate increases in these areas during the third quarter of 2016.

Percent of 228 Minnesota businesses, by industry, that anticipate increases in these areas during the third quarter of 2016..