Minnesota’s business leaders are feeling the most optimistic about economic conditions in nearly two years, according to Twin Cities Business’ quarterly economic indicator survey. Their optimism has increased by 24 percent from a year ago at this time.

The state’s only forward-looking economic indicator survey found that easing credit has helped. The ability to obtain financing has improved slightly for two consecutive quarters, and heading into the new year, only 11 percent of the survey’s 469 participants expect it will become more difficult in this quarter. This is the lowest level of anticipated difficulty since the survey began in mid-2011. It’s also a 35-percent improvement from one year ago at this time.

No. 1 Reason to Operate a Business in Minnesota: Quality of its people and work ethic, according to 56 percent of 356 business leaders responding to this question

Finding qualified labor, however, continues to become more difficult and is now at its worst level since the survey began. In fact, finding good employees appears to be the only major challenge facing Minnesota’s business leaders today beyond planned and potential new regulations, taxes and other government-led administrative and financial burdens.

Twin Cities Business’ survey findings mirror those of other recent reports on growing challenges finding qualified employees.

The state’s unemployment rate dropped to 4.6 percent in November, the lowest since the summer of 2007 and well below the national rate of 7 percent. Ordinarily such a decrease is positive—it signals an increase in job creation and decrease in layoffs. In Minnesota, however, the most recent drop in unemployment was attributed more to the fact that fewer people are looking for work. The state’s labor force participation rate is now at 70 percent (its lowest level since 1980), as more people retire.

Similarly, U.S Labor Department initial estimates for hiring in December found only 74,000 jobs had been added during the month, the slowest rate in three years and far fewer than expected. The unemployment rate also dropped, because more people have given up looking for a job or have left the workforce.

As the labor participation rate declines and finding qualified employees becomes more difficult, Minnesota employers say they’re looking to increase their headcounts at the fastest pace in nearly two years, with 37 percent of business leaders saying they plan to add to their headcounts – up 23 percent from those who planned to hire one year ago at this time. This is expected to increase average salaries, both to attract new talent and retain employees who are more likely to be courted by other companies.

Businesses also plan to invest more in capital expenditures and research and development in the first quarter, with the most financial support for these areas since early 2011. Some 35 percent of respondents plan to increase spending in capital expenditures, up 13 percent from last quarter and 22 percent from a year ago at this time; 23 percent say they plan to increase R&D spending, up 13 percent from a quarter ago and last year at this time.

While spending more on hiring, capital expenditures and R&D, business leaders indicate they expect overall productivity to flatten, overall production to decrease slightly and revenue to rise only slightly. Meanwhile, they also expect their operating margins will improve compared with last quarter and one year ago at this time, which to analysts may signal plans to increase prices.

More than 360 respondents also shared their thoughts through write-in answers to questions asking what their greatest challenges would be this quarter. In summary, they seem to express concerns about finding qualified talent while also increasing salaries, growing revenue and dealing with government or regulatory requirements.

“Continuing to create efficiency and increased revenue streams, not at the expense of employee reduction nor increased fees to customers,” wrote one respondent. “Passing on or absorbing the impact of coping with additional regulatory challenges,” wrote another. “How to invest in the company when all our profit goes to taxes,” said another.

Gov. Mark Dayton’s Approval Rating, according to the 469 business leaders responding to the survey

Asked about anything else they’d like to add, 70 people chimed in, mostly about how bad Minnesota is becoming for businesses because of increased taxes and regulation. Among their comments, however, was this: “I’m tired of upper management at companies that are afraid to move their companies ahead in this difficult economy. In the go-go nineties, these ‘experts’ were lauded with accolades about how great their management was. But now when they have to earn their keep and do real work, and make real risks, their only solution is to cut, cut, cut and blame the government or others. They are the reason the economy is stagnant. They have no vision. They hide behind others who scapegoat anyone they can. It is great to work with some companies that are making forward-thinking decisions.”

Asked about the single best reason to operate a business in Minnesota, 56 percent of 356 leaders responding said it was the quality of Minnesota’s residents and their work ethic. Next highest was the state’s culture, quality of life and weather (yes, weather); third on the list was proximity to customers.

This quarter’s survey also introduced a new question polling business leaders on their opinion about how Mark Dayton is doing as governor. Only 36 percent approve; 43 percent disapprove and 20 percent say they are unsure.

Another new question, added because of rising concern in 2013 about tax and policy changes that seem to target the state’s more affluent individuals, was whether respondents planned to retire in Minnesota. Less than 50 percent said they did, nearly 20 percent said they did not and the remainder were undecided.

Percentage of respondents anticipating increases (Business Planning) or improvements (Business Conditions) in these areas during the first quarter of 2014 – diffusion index view: all responses for “increase” or “improve,” plus one-half responses for “maintain” or “stay the same.” Above 50 is positive; below is negative.

The tables above provide a diffusion-index view: overall responses for “increase,” plus one-half of responses for “maintain” from 469 business leaders surveyed in late September, 2013.

Methodology

Twin Cities Business conducts this survey quarterly to provide a look at business planning and sentiment among leaders across all industries in Minnesota. Answers from 11 questions are used to formulate the Minnesota Economic Outlook Index, the only indicator of what business leaders across the state are planning for the immediate quarter. An email link to an online survey was sent to 16,136 Minnesota business leaders in mid-December, 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 December 19, 469 businesses responded, resulting in a 2.9 percent net response rate. Of those who responded, 87 percent represented privately held businesses.

See Below For Additional Details About How The Outlook
Of MN Business Leaders Has Changed Over Time