Understanding Wisconsin's Economy: Survey Results and Panel Discussion

1. 2013

2. 2 2 Welcoming Statement Mickey Noone First Business Bank - Northeast Presentation of Survey Results Dennis Winters, Chief of the Office of Economic Advisors at the Wisconsin Department of Workforce Development Introduction of Panelists Mickey Noone Panel Round Table and Q&A Margaret LeBrun, Insight Magazine, Moderator Closing Mickey Noone Agenda

3. 3 3 First of all, You need to understand Wisconsins economy

4. 4 4 Economic Indicator #1: Sales Revenue Just 50.7% of businesses increased Revenue, breaking the upward trend begun in 2009. Those who reported positive change mostly experienced revenue growth of 1-3%, with slightly lower proportion seeing a growth of 4-6% and 10+%.

5. 5 5 Economic Indicator #2: Profitability With significantly higher proportion of businesses reporting decreased Profitability at 39.1% vs. 53.6% in 2012, and significantly lower proportion of businesses reporting increased Profitability in at 41.2 % vs. 30.6% in 2012, the performance in 2013 was worse than the spectacular performance in 2012.

6. 6 6 Economic Indicator #3: Total Operating Cost as a % of Revenue More than half of the businesses reported increased Operating Cost.

7. 7 7 Economic Indicator #4: Capital Expenditures Though overall, businesses did not report a significant change in their Capital Expenditures from last year, the percent of businesses reporting decreases in Capital Expenditures kept going down and the percent of businesses reporting increases in Capital Expenditures also slightly went down in 2013 after touching the peak since 2008.

8. 8 8 Economic Indicator #5: Number of Employees Headcount remained fairly stable for 2013 as it did in last many years, with almost 61% of the businesses reporting no change in Number of Employees in 2013. 2012 saw almost 35% businesses increasing Number of Employees, the proportion was significantly lower at just 23% in 2013.

9. 9 9 2013 was a year of new realizations: Economic growth is below potential Slowest post-war recovery on record Global slump Government problems are far from over Deficit Debt Sequester ACA is here (sort of) and nobody knows what it means Summary of Findings 2013

10. 10 10 Looking Forward: 2014 Expectations Performance compared to expectations in 2014 was not as optimistic as it was in 2013. The percentage of businesses which performed beyond expectation went significantly down from 27.5% to 19.9%. Though not significant, the percent of businesses which performed below expectations rose from 32% to 39.4%.

11. 11 11 Economic Predictor #1: Sales Revenue The proportion of businesses projecting increased Revenue for 2014 is significantly lower at 58.93% against 69.38% projecting for 2013 last year.

12. 12 12 Economic Predictor #2: Profitability Projections for 2014 profitability were significantly down from 2013 projections with significantly more businesses at 21.9% vs. 13.9% in 2013, projecting decreased Profitability.

13. 13 13 Economic Predictor #4: Capital Expenditures A significant decline in the proportion of businesses projecting increase in Capital Expenditure for 2014 was noted at 38% vs. 46% last year. The proportion of businesses projecting unchanged Capital Expenditure went up significantly for 2014 at 49.6% vs. 40% for 2013, suggesting less polarized results in 2014.

14. 14 14 Economic Predictor #5: Number of Employees Compared to 43% projected for 2013, only 26% of businesses are expecting Number of Employees to increase in 2014, which is the lowest projection since 2009. Only 9% expect to decrease the number of employees next year.

15. 15 15 Contributions: Actions to Improve Company Performance The majority of businesses in Northeast region that responded to this question reported Improved Internal Efficiencies (52.7%), Increased Sales Efforts (47.9%) and Increased Marketing Efforts (42.8%) as the top three reasons for Improved Performance.

16. 16 16 Expectations have dropped for 2014. JUSTIFIED ? Three times smitten get a complex Realistic based on the economic outlook

17. 17 17 GDP = C + I + (X-M) + G

18. 18 18 RECESSION COMPARISONS LAGGING ACROSS ALL INDICATORS Source: William Testa, Federal Reserve Bank of Chicago

19. 19 19 Investment Growth: Is in productivity, not expansion Source: BEA, OEA

20. 20 20 REAL ESTATE EQUITY GETTING A NICE REBOUND

21. 21 21 SECURITIES APPRECIATION IS GETTING US BACK OVER THE HUMP

22. 22 22 STATE AND LOCAL SPENDING ON A NEW TRAJECTORY

23. 23 23 Managing Risk: Where is the incentive to expand

24. 24 24 Thousands 5.5% 6.5% 7.5% 8.5% 9.5% Q1 15 Q1 17 Unemployment rates assume a participation rate of 63.5% JOBS GROWTH SCENARIOS CONTRAINTS ON ECONOMY Source: William Testa, Federal Reserve Bank of Chicago

25. 25 25 WISCONSIN JOBS RECOVERY VERSUS PREVIOUS CYCLES

26. 26 26 He said, She said.

27. 27 27 27 HE SAID, HEY BABE, LOOK THE ECONOMY IS GROWING NICELY

28. 28 28 28 SHE SAID, WE STILL HAVE A WAYS TO GO, DEAR

29. 29 29 HE SAID LOOK HONEY, HOUSING MARKET IS UP NICELY

30. 30 30 SHE SAID SWEETHEART, WERE NEVER GETTING BACK THERE

31. 31 31 31 HE SAID, SUGAR, JOBS ARE CLIMBING thousands

32. 32 32 32 SHE SAID, DARLING, DONT PISS OFF YOUR BOSS

33. 33 33 HE SAID, LOVE, THEYRE JACKING UP WAGES EVERYWHERE The minimum wage will increase in 10 states on January 1, 2013. Employers to be more generous with pay raises next year, CNNMoney. An improving job market is boosting wages , Herald and News. SHRM consensus is for an average budget increase of 3 percent . Hay Group says 3 percent salary increases in 2013.

34. 34 34 SHE SAID, JIM, GET A GRIP

35. 35 35 HE SAID, DREAMBOAT, WERE GONNA BE RICH INCOME GROWTH (Q1:2010 Q3:2012) Source: BEA, OEA

36. 36 36 SHE SAID, WILL YOU WAKE UP AND SMELL THE COFFEE

37. 37 37 Who is in demand?

38. 38 38 * Job Openings includes both turnover and new jobs that are created . MOST JOB OPENINGS BY OCCUPATION

39. 39 39 MOST JOB OPENINGS ON JOB CENTER OF WISCONSIN

40. 40 40 MOST OFTEN HEARD POSITION CHALLENGES CHARACTERISTICS Occupation Annual % Growth Growth Openings Replacement Openings Total Openings Typical Entry Education Median Wage Heavy truck drivers 1.90 9,490 9,040 18,530 H.S. diploma $38,300 Welders 1.50 1,840 3,010 4,850 H.S. diploma $37,980 Customer service representatives 1.50 7,760 14,180 21,940 H.S. diploma $31,430 CNC machine operators 2.20 1,310 1,020 2,330 H.S. diploma $35,860 Maintenance workers, machinery 0.70 180 440 620 H.S. diploma $39,460 Nursing aides 1.50 6,300 4,900 11,200 Postsecondary $25,020 Registered nurses 2.20 13,780 10,450 24,230 Associates degree $62,860 Mechanical engineers 0.70 470 2,010 2,480 Bachelors degree $68,340 Food preparation and serving workers 2.30 15,360 17,140 32,500 < high school $17,910

41. 41 41 WHAT TRAINING TO PURSUE FIVE MAKE ALL THREE LISTS Make all three lists Total Openings Typical Entry Education Median Wage Food preparation 32,500 < high school $17,910 Customer service 21,940 H.S. diploma $31,430 Registered nurses 24,230 AD/BS $62,860 Heavy truck drivers 18,530 H.S. diploma $38,300 Health care aides 11,200 Postsecondary $25,020 Make two lists Welders 4,850 H.S. diploma $37,980 Material Movers 38,900 H.S. diploma $23,590 Retail sales 69,030 < high school $20,570

42. 42 42 Survey Background Survey sent to all Northeast Wisconsin businesses with one or more employees; 7,120 sent Those targeted: Owner, President, CEO, CFO 382 valid responses; 5.37% response rate Heavily represented by small businesses (<100 employees) Segmented by business type, markets served, types of customers 16% of respondents were engaged in manufacturing Questions on eight economic indicators Quantitative and qualitative responses Margin of error .05 with 95% confidence level

43. 43 43 Survey Response Rate Survey not sent to government, public sector, higher education

44. 44 44 Survey Example Self selection: Target Market Business classification Business type: Manufacturing, Service, Retail, Technology, Other Eight economic indicators: Sales revenue Profitability # Employees Wages Capital expenditures Pricing Operating costs Capacity Reasons for performance Current event question copy included in your handouts

45. 45 45 Segmentation Business Type Number of Employees Target Market National/ International 13% Midwest 9% Wisconsin 17% Northeast 61% Other 18% Technology 2% Service 42% Retail 22% Manufacturing 16% 20 to 99 18% 5 to 19 43% 1 to 5 35% 500+ 0% 100 to 499 4%

46. 46 46 Broad sample of business community; not cherry picked Self assessment by optimistic groups Two surveys in one: Actual for 2013 Projection for 2014 Survey instrument not meant to measure previous years projections to current year actual results Value of statistically significance changes Interpreting the Results

47. 47 47 Economic Indicator #6: Overall Wage Change The proportion of businesses projecting same wage level for 2014 is significantly higher at 43.77% vs. 29.67% for 2013, indicating less polarization in 2014. Not surprisingly, the proportion of businesses projecting high wage level in 2014 is significantly down from 67% last year to 51.46%.

48. 48 48 Economic Indicator #7: Change in Pricing Projections for 2014 are in line with what was projected for 2013. For 2014, 55.3% of businesses are projecting price hike, which is almost equal to the projection made for 2013. Most of the businesses are reporting either no change or slight increase in Prices.

49. 49 49 Economic Indicator #8: Operating Capacity

50. 50 50 Looking Forward: Expected Expenses Change for 2014

51. 51 51 Looking Forward: Expense Increase to be Passed to Customer

52. 52 52 FirstBusiness.com Full reports for 2013 First Business Economic Surveys Northeast Wisconsin Dane County Milwaukee & Waukesha Counties Cross Regional report available Prior year reports

53. 53 53 Panel Discussion Craig Dickman CEO Breakthrough Fuels Darwin Copeman CEO Jewelers Mutual Insurance Ben Griggs CEO Aarrowcast, Inc. Dennis Winters Chief of the Office of Economic Advisors at the Wisconsin Department of Workforce Development Margaret LeBrun Todays Moderator Insight on Business