Business outlook brightens for 2012

GETTING BETTER? Less than one-quarter of businesses responding to the survey said they expected business to be worse one year from now. / PBN GRAPHIC
GETTING BETTER? Less than one-quarter of businesses responding to the survey said they expected business to be worse one year from now. / PBN GRAPHIC

A lost year: that’s how many Rhode Island business owners describe 2011, its false starts, scorched-earth politics, consumer malaise and morbid fascination with a double dip. Anticipating recovery, many Ocean State industries instead had the rug pulled out from under them in 2011 and ended up losing ground rather than making it up.
Consumer spending languished until a holiday-shopping rally, while unemployment remained stubborn. Capital investments were soft, and the real estate market continued to sink under the weight of a steady supply of foreclosures. A tsunami in Japan, a financial crisis in Europe, a winter of endless snow removal and Tropical Storm Irene’s blackout contributed additional drag on markets that never seemed to get off the ground.
Yet through it all – the joblessness, underwater mortgages and the euro – many local businesspeople are marching into 2012 with a brighter outlook than they were a year ago, the last time optimism about a recovery was on the rise.
Maybe it’s due to the successful efforts to enact state-worker pension reform, but responses to Providence Business News’ winter 2011 survey show Ocean State business owners more confident about the economy after enduring a disappointing year than they were when it started.
Roughly two-thirds of the 126 respondents to the survey – which was sent to 1,148 businesses in Rhode Island and Bristol County, Mass. – described the outlook for their business a year from now as “better than this year,” up 5 percentage points from last summer’s survey and much improved from a bleak 39 percent in December 2008.
And more than half, 54 percent, described their business activity as “better than last quarter,” compared with 44 percent last December and 32 percent in December 2008.
“Most of the respondents are doing better then they were doing last quarter, which is a sign that the Rhode Island economy is improving slowly,” said Edward M. Mazze, distinguished professor of business administration at the University of Rhode Island, who assists PBN in drafting the semi-annual survey. “You are seeing better results, they are more optimistic, but the same problems that they have had to deal with in the past exist today. I also think that an awful lot of what you are seeing is survival of the fittest.”
In what may be more exciting to Rhode Islanders than the overall business outlook, 43 percent of respondents said they planned to hire new workers in the next quarter. Although still below half, that’s the highest percentage to say they expect to take on new workers since the survey started in the summer of 2008 and a significant improvement over last December, when the figure stood at 29 percent.
Along the same lines, only 2.5 percent of business owners said they were planning work force reductions, compared with 8 percent over the summer and last winter.
That cautious optimism is evident at local businesses like Brewster Thornton Group Architects in Providence, which suffered through a disappointing 2011 but anticipates a brighter 2012. “This year we experienced a slight double dip because the stimulus projects wrapped up, but we are experiencing an uptick in residential calls, so we are cautiously optimistic,” said principal Barbara Thornton. “We are hoping 2012 is a bounce back.”
Brewster Thornton does work for both residential and institutional clients, and Thornton said both dried up somewhat this year with the slow housing market and tight public-sector budgets.
While residential calls have picked up, it’s the prospect of some institutional projects that Thornton said could really provide a boost.
“We won’t know until January, but if we get some institutional work, we will start hiring,” Thornton said.
Another potentially important, positive sign is that businesses appear to be building inventory to levels not seen in years, according to survey results. Slightly less than 30 percent responded that their inventory of purchased materials is “greater than last quarter,” up from 22 percent over the summer and 15 percent last December.
According to Mazze, these rising inventory levels could be a sign that companies are betting on increased demand for their products.
“I think they are doing it for two reasons: the concern that the cost of materials may go up and because the economy is changing there might be orders coming in quickly,” Mazze said “People are betting the economy is getting better. Retail sales have really started jumping up. If consumers feel good, businesses feel good.”
Of course, business outlooks in any year vary widely from industry to industry, and in the surging tech sector, many businesses say the only thing preventing them from hiring is a lack of qualified applicants.
“We are in [information technology] staffing and are under no illusion that our experience is indicative, but we have seen very good things and hope for more,” said James Wright, partner at Bridge Technical Solutions in East Greenwich. “In 2009 and 2010 what we encountered was slowness. There was no desire [from companies] to bring people on. I think 2011 was the year where we started to see a sense of urgency, purpose and a willingness to take that risk.”
In the last few months, Wright said he has seen some “very positive indicators” from companies looking for both permanent hires and contractors.
And contrary to the notion that companies hire more contractors during downturns, Wright said an increase in contract hires usually comes when businesses are ramping up to take on large projects.
One dynamic many observers see, especially in the tech sector, is that companies who cut back spending on staff and equipment since the recession have reached a point where they have to invest, even if market conditions remain less than ideal.
That impression is echoed in the winter survey results, in which 29 percent of business owners said they have plans to buy “big-ticket items” for their companies, up from 20 percent last summer and 23 percent a year ago. “I just talked to a director of IT at a company, and he said there are only so many years we can go before you have to invest,” Wright said.
That sentiment was echoed at Computer Associates Inc. in North Smithfield, where CEO Jim McCooey said the company, which does software consulting and development, is full-speed ahead.
“We are having a very good year, and I think it will finish up as our best year ever,” McCooey said. “The outlook for 2012 is very positive, and I would say it is largely a result of pent-up demand. Many companies are running legacy systems. So many people have pushed their existing server or desktop network well after it was due to be upgraded.”
But as much as optimism has picked up in many industries from a year ago, the survey results show that current market conditions in Rhode Island overall remain nearly as challenging as they have been for the past several years.
Asked whether their companies had more new orders this quarter than last quarter, only 44 percent said they did, the same percentage as last winter and less than the 54 percent that said so this past summer.
Less than half of respondents, 48.7 percent, said their net income for 2011 was greater than the year before, down from 52.6 percent over the summer and 49.4 percent last December.
Even business owners who see things picking up in the year ahead think their prospects would likely be better if they were in another state.
“I would say we are coming through the economic doldrums, and this year I am seeing some guarded optimism, a less discouraging economic outlook, not that it is overwhelmingly great,” said Grafton H. “Cap” Willey IV, managing director of CBIZ Tofias and co-chair of the Rhode Island chapter of the Smaller Business Association of New England.
“I am seeing much more optimism in Massachusetts and Boston than in Rhode Island, and our business goes across the border regularly,” Willey said. “[Rhode Island has] dug a deeper hole than they did.”
Less than half of respondents said they expect the state’s economy to improve either slightly or significantly while more than a quarter predict it will worsen to some degree.
Although better than they were over the summer, those numbers are more pessimistic than last winter, when 53 percent predicted some statewide economic improvement and only 22 percent thought things would get worse.
“You can’t get away from the fact that Rhode Island has been hit very hard from the recession and by the perception that the state is not a good place to do business,” Mazze said. “We have the highest unemployment and probably underemployment rate in this region of the United States. Probably the only thing that may have had a positive impact is that [the survey] was done after the pension legislation was passed.”
At the top of the list of culprits business owners point to when asked what is holding them back, the “weak economy” remains No. 1, cited by more than three-quarters of respondents, followed by taxes and health care costs, which were both mentioned by just more than half. While still prominent concerns, both taxes and health care costs fell as a percentage of business owner’s chief problems compared with the summer survey and last winter.
Rising in respondents’ minds was a “shortage of qualified workers,” a problem that many in the state may see as a good thing. Worried employers means they are searching for people to hire.
The 27.3 percent of business owners who cited a shortage of qualified workers as their greatest business challenge was the largest percentage in the survey’s history and up from 24.6 percent in the summer and 18.47 percent last winter.
Still, much of the optimism for the year ahead comes from relief about what didn’t happen in 2011 – a double-dip recession or implosion of the eurozone – than what did.
At Northeast Public Relations Inc. in Central Falls, President Robert Beadle said the effects of the recession hit his six-year-old firm in 2011 instead of two years ago when most were feeling it.
“I think I hit the valley in the middle of [2011] and am climbing out now,” Beadle said. “2011 was not an improvement, but I am optimistic.”
Like many local businesses, Beadle said he is counting on diversifying his client base and becoming more creative and innovative to grow, instead of expecting the Rhode Island economy will pick up noticeably.
“I don’t think the economy will get that much better,” Beadle said. “If a business is going to stay in business, it is going to have to innovate to grow.”
Bill Ostendorf, president of Creative Circle Media Solutions in East Providence, is looking ahead to 2012 with the kind of wary optimism prevalent throughout Rhode Island this winter.
“We are very hopeful that the first quarter of 2012 will represent a breakthrough,” Ostendorf said. “We know there is pent-up demand out there.”
Creative Circle builds websites for media outlets and newspapers (including PBN, the three Beacon Communications publications, the four Providence Media publications and The Rhode Island Catholic, among others) and hosts online classified advertising, which Ostendorf said he has seen pick up recently, although less in Rhode Island then elsewhere.
On a larger scale, Ostendorf said he has seen a huge increase in the number of companies requesting bids for website work. Unfortunately, many of those companies have not pulled the trigger and gone through with the projects yet, Ostendorf said, a situation he expects has to change at some point.
In the meantime, Creative Circle has done some discounting, diversified its client base to nonmedia websites and invested in new software platforms so the company can ramp up production when the orders start coming in.
“2011 was really a lost year; we thought it was going to be better than it was,” Ostendorf said. “I think there was a real concern there was going to be a double dip, but people see fourth quarter and Christmas spending and that tells businesses people are ready to spend.” •

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