2020 outlook: Optimism, with a healthy dose of caution

Running a business is time-consuming. There’s so much to do that sometimes it’s hard to look beyond what needs to get done today. Except that business owners can’t afford not to look forward, lest they miss signs in the economic tea leaves that might have a big influence on business in the coming year.

As it gauges current and future activity in the economy, the Federal Reserve System also pays attention to firms’ expectations in hopes of anticipating economic changes relevant to monetary policy. The turn of the calendar offers a useful time to ask what the near-term future might hold, and contacts of the Minneapolis Fed in recent weeks have consistently communicated a message of cautious optimism.

Businesses in the Ninth District continued to report growth at the end of 2019, according to the most recent iteration of the Beige Book, reported by the Federal Reserve Bank of Minneapolis and released on Jan. 15 (covering a period from mid-November through December). In particular, the report noted that growth in construction and consumer spending during the holiday period was generally reported to be solid. (Similar to the Beige Book policy, all sources here remain anonymous to protect confidentiality.)

Looking forward to 2020, contacts overall reported moderate optimism. A poll of large Minnesota employers late in the year by the Minneapolis Fed found that two-thirds had an optimistic outlook for 2020; however, they also reported that their 2020 outlook was slightly lower than the outlook six months earlier. A December poll of mostly greater Minnesota firms showed modestly more optimists than pessimists (40 percent and 25 percent, respectively) when asked about their outlook for 2020.

A survey of Minnesota staffing firms by the Minneapolis Fed found that two-thirds were expecting higher job orders in the first half of 2020 compared with the same period last year which, if achieved, would be an improvement in job order activity during the fourth quarter of 2019.

But the general outlook was not all roses, as contacts cited numerous concerns that could prick any bubble of future optimism. A Minnesota manufacturer of outdoor furniture reported a solid 2019, but expected softer—though still positive—growth in 2020 due to concerns over rising consumer debt. A contact in food and consumer products reported that the industry generally saw positive growth last year, and 2020 “will be like or better than 2019” given strong consumer confidence, but he also acknowledged growing concern over consumer debt.

Industry data suggested an uptick in construction starts in much of the district to end 2019, particularly in Minnesota. Construction contacts widely reported project backlogs to be good to great. But they also noted that extreme weather and persistent labor shortages were volatile elements in the economic chemistry of turning project pipelines into revenue and profits.

Difficulty finding necessary labor has been a persistent theme among contacts for several years running, and that’s not likely to change in 2020. A contact in western Wisconsin said at least two manufacturers in the area were trying to add shifts, “but the workforce shortage is hampering that effort.”

Among polled staffing firms, more than one-third also expected unfilled job orders to increase due to tight labor conditions. A staffing contact in eastern North Dakota said, “In my 24 years working in the staffing industry, there have been times when the labor market was candidate driven. But nothing like today.” In response, the contact said he’s seeing an uptick in companies—even very small ones—outsourcing some work, “given the challenges” of finding available local labor.

A staffing contact in Michigan’s Upper Peninsula said clients in health care equipment and wood products were projecting a healthy start to the new year. “Overall, I would say that we’re starting the new year off strong, with a lot of [job] orders and some big contracts in the works. Employers aren’t taking their foot off the gas with orders.”

However, not all job orders are created equal, and wage pressure was both a problem and a solution for different businesses. The western Wisconsin contact said three regional manufacturing firms recently had to redo their wage scales companywide to stay competitive. The Upper Peninsula contact said notable wage increases were being seen for some jobs, with positive recruitment results. At the same time, “Clients that aren’t increasing their rates are feeling the negative effects with high turnover and decreased employee morale. If a client calls with anything less than $11 per hour, I’m honest with them that it will be very difficult for us to fill the position with a quality associate.”

Almost regardless of sector, firms looking ahead to 2020 are also looking over their proverbial shoulder for existing and potential threats. Some don’t have to look very far. For example, many contacts in agriculture hope things simply aren’t as bad as they were in 2019, given an extreme winter, a wet spring, and finally a wet fall that forced farmers to leave a lot of crops in place. They now face a daunting removal process before planting season; given the necessary drying that has to take place before storage, demand for propane has increased significantly, giving farmers an additional cost headache on top of low prices.

Suffice it to say, farmers are battle-scarred going into 2020. A Montana rancher noted that continued low prices across the farm sector “make investing [in 2020] difficult or impossible.” A sugar beet farmer there added that he was “trying to stay above water” while tariffs and other trade-related matters were in place.

In fact, trade policy is on the minds of many businesses in the district going into 2020. In the poll of large Minnesota employers (conducted prior to the recent announcement of trade agreements between the United States and China), close to half said tariffs have had a negative effect on operations. A manufacturer in southwestern Minnesota said tariffs and other trade policies have significantly affected input costs for its products. In mid-December, the contact said, “Almost daily, we get notifications from vendors that prices will increase again in January.” While the company has had success identifying alternative (nontariffed) vendors, it nonetheless complicates the already tough business environment.

Despite the challenges, optimism, however modest, seems to prevail. The Minneapolis Fed conducted a districtwide poll of businesses in early January and, on average, respondents overall were net positive on expectations for demand, employment, and investment in the first quarter of 2020 relative to the same quarter the previous year.

A Minnesota manufacturer noted some difficulties, but even a worst-case scenario wasn’t catastrophic. “While our outlook for orders is a bit softer looking forward, I think employment will remain strong. There are so many unfilled open jobs in manufacturing that if things slow down, eliminating the open jobs might be a first move people make before they cut positions.”