Businesses see reasons for optimism

Since the financial crisis, a Narragansett Bay-sized cloud of self-doubt or “irrational negativity,” as Gov. Lincoln D. Chafee described it, has been among the factors blamed for Rhode Island’s inability to regain its financial footing.
This self-esteem problem was called out in the Make It Happen Rhode Island forums one year ago and triggered The Rhode Island Foundation to launch the In Our Backyard advertising campaign to raise public confidence. The R.I. Economic Development Corporation also created a new reputation-management committee.
Whether negativity itself was really to blame for the poor economic outcomes Ocean State businesses suffered through is difficult to know for certain. But if it was, the attitude adjustment needed to lift Rhode Island out of its collective funk may be farther along than most people expected.
For only the third time in the five-year history of the Providence Business News semiannual Business Survey, a majority of business leaders now anticipate economic improvement in the state over the next 12 months.
In fact, the nearly two-thirds (64.2 percent) of survey respondents who said they expect some level of economic improvement over the next year is far and away the highest percentage the survey has ever recorded. (The next-most-optimistic survey was in the winter of 2010, when 52.6 percent saw progress on the horizon.) And the 4.5 percent who said they expect the Rhode Island economy to “significantly improve” is also the highest since the survey started in 2008.
“We have come out of this downward turn and people have adjusted to what the economy is,” said Steven M. Parente, senior vice president and director of retail banking at Bank Rhode Island. “With the unemployment rate and state fiscal struggles, that is not the recovery we may all want, but businesses and people have adjusted economically.”
Since last year’s survey, the Rhode Island economy has maintained a pace of slow gains signaling movement in the right direction, but still plenty of room for improvement.
The state unemployment rate dropped from 10.5 percent to 8.9 percent over the last 12 months, but that’s still the third-highest unemployment rate in the country, exceeding the national jobless rate by 1.5 percentage points.
And the dropping state jobless rate has been caused by residents leaving the workforce, more than positive job creation.
In July, there were only 700 more Rhode Island-based jobs than there were in July 2012 and population projections for the state are basically flat for the next decade. Indeed, the growing current of optimism detected in the survey of 617 companies – of which 69 responded – likely reflects a strong internal outlook within successful businesses for the year ahead.
Fifty-five percent of respondents reported more new orders this quarter than the previous quarter, 12 percentage points more than those surveyed last winter and 10 percentage points higher than last summer.
More than two-thirds of respondents (68 percent) had an improved outlook for their own business for the next 12 months, roughly the same share as last winter and 6 percentage points better than last summer. The share reporting improved net annual income, 54 percent, was also similar to last winter, but a 6 percentage point increase from last summer.
“There is optimism that the economy is going to improve and one of the things we see is that businesses that got through the recession are doing better,” said Edward M. Mazze, distinguished professor of business administration at the University of Rhode Island.
Despite the new optimism, survey responses continued to reflect some of the post-recession cost-consciousness evident in businesses across the country.
Fifty-seven percent of respondents said they do not expect to purchase any big-ticket items or capital equipment in the next quarter, up 2 percentage points from last winter.
The number planning to expand facilities was flat from last winter, although it rose 5 percentage points from last summer.
Perhaps the best news is that 96 percent of companies said they did not intend to close any facilities in the next quarter.
“Even with the enthusiasm, businesses are hesitant to expand or make major investments,” Mazze said. “Part of that is we are dealing with small and medium-sized businesses whose customers are mainly in this area.”
From his vantage point at BankRI, Parente said he is seeing steady improvement in both the retail and commercial side of the business, with increased deposits and lending.
“We are seeing that consumers are feeling better,” Parente said. “We have really had a tremendous amount of mortgage refinances and are seeing more home purchases. More people are qualifying to refinance or take out some equity. And we are seeing increased deposits in money markets and short-term CDs. People are saving a little more.”
On the commercial side, Parente said BankRI is finally seeing some appetite for expansion and defaults on commercial loans are very low.
At Blount Fine Foods, President Todd Blount said the company saw revenue increase from $128 million to $149 million in fiscal 2013, signaling gains in disposable income and consumer confidence. The company is projecting $165 million in sales during the next fiscal year. The company, with operations in Fall River and Warren, makes custom soups and foods for restaurants and supermarkets, segments that are growing as more people move toward prepared food.
“Both our retail and food-service sales are growing, and in addition to same-store sales, we are getting into convenience and drug stores and big boxes,” Blount said. “There is customer demand for stores like Cumberland Farms and CVS to add more food, which is a good sign for the economy. It shows people are willing to upgrade from hot dogs to homemade food.”
Blount is hiring as it moves into new markets, such as macaroni and cheese, and vegetable sides and in what could be another sign of improving regional commerce, is finding a tougher labor market, Blount said.
In this summer’s survey, 38 percent of businesses responding said their level of employment is higher than it was the previous quarter, 5 percentage points more than over the winter and 7 percentage points more than last summer.
Even better, nearly half of companies responding, (49 percent), said they plan to hire employees in the next quarter, an increase of 4 percentage points from the winter survey and 12 percentage points from last summer.
And for the first time, not one company said they expected to lay anyone off. (Last winter 7 percent of companies said some layoffs were expected.)
Like Blount Fine Foods, Newport-based Web-development company Drupal Connect has been one of the companies consistently hiring.
Drupal operates nationally, so only a small portion of its business originates in Rhode Island, and President and CEO John Florez said he sees mixed economic signs for the local economy.
“I would like to see more businesses and tech companies in the area – maybe with the implementation of the new fiber-optic network that will happen,” Florez said. “From a general-business standpoint there is concern out there, and our accountants said they see a lot of other companies struggling. But a few years ago you wouldn’t see people in restaurants and now they are filling up.”
Founder of an information-technology staffing firm before he started Drupal Connect, Florez said recruiting talent is harder in Rhode Island than in Boston or New York. But he doesn’t think that the business climate, tax or regulatory structures prevent companies from being successful here. “I really do think the resources are out there,” Florez said. “Our tax rates aren’t terrible compared with previous years when we saw growth.”
Florez said Drupal expects to hire between 15 and 20 new workers over the next year.
Not all CEOs of growing companies are as forgiving of state political leadership.
Greg Dimas of Delphi-US, a staffing company in Newport with about 50 employees, said Rhode Island could benefit from a more pro-growth mindset.
“The long and short of it is the region’s inability to attract high-end employers,” Dimas said. “Red tape and taxes – those are superficial. It is a mindset, and it is a shift of government [that is needed] to realize the importance of business instead of government being a provider.”
Asked to address the greatest challenges of doing business in Rhode Island, survey respondents, as they did during the winter and last summer, listed the weak economy, health care costs, government red tape and taxes as the four leading issues. The only difference this summer was that health care moved up to second from third on the list, ahead of taxes.
On the brighter side, only 7 percent of respondents listed access to capital as a problem compared with 10 percent and 15 percent in the winter and last summer respectively.
Diminishing customer base was also less of a concern, mentioned by one-quarter of respondents from more than one-third in the previous two surveys.
More than 35 percent of respondents listed a shortage of qualified workers as a challenge – up from 28 percent and 30 percent in the previous two surveys – a problem that can be viewed in the positive light of meaning employers are looking to hire.
At Collette Vacations in Pawtucket, Chief Financial Officer John Galvin said education is the most important thing to service businesses like his that rely on maintaining and building a high-quality workforce.
“We don’t invent anything, so the quality of the team is critical to our success,” Galvin said. “Things like education and attracting businesses that create a more-robust talent pool are very important.”
Collette Vacations’ revenue rose 13 percent in fiscal 2013 and is so far tracking up 40 percent in fiscal 2014, Galvin said, prompting the tour operator to add 50 new positions in the past year.
Galvin attributes some of Collette’s success to the maturation of the baby boomer generation into prime tour-purchasing years, something reflected especially in the aging New England population.
“We rely on discretionary income and are having a phenomenal year, so that’s a good sign,” Galvin said. •

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