Hiring rises, but so too do health care costs, concern about skills gap

 / Source: PBN Research; PBN ILLUSTRATION/LISA LAGRECA
/ Source: PBN Research; PBN ILLUSTRATION/LISA LAGRECA

In signs of a strengthening economy, businesses are increasingly reinvesting in both employees and big-ticket items despite rising health care costs and other concerns, according to Providence Business News’ Summer 2016 Business Survey.

Nearly two-thirds of respondents reported better business activity in the current quarter compared to the previous three-month period. At the same time, nearly 60 percent of companies reported stronger profits in 2016, while fewer reported a decline in profitability.

Those positive signs were backed by a two-pronged increase in investment, both in big-ticket equipment purchases and employment. The survey found 33.8 percent of companies were planning big-ticket purchases in the coming quarter, a 5.6 percentage point increase from the previous summer. A slight majority, 51.3 percent, reported higher employment than last quarter (compared with 37.5 percent last summer). And 54.1 percent plan to hire in the next quarter, compared with 52.7 percent a year ago.

But there are some warning signs as well.

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While three-quarters of respondents reported a better outlook for their business in 2017, that’s a 6 percentage point decline from last summer. And the percentage of companies predicting a worse outcome for the state’s economy in the next 12 months, 11.8 percent, more than doubled from 5.4 percent in the summer of 2015.

The concern among some employers could be tied to a variety of factors, including the state’s bureaucracy and the national political climate in a presidential election year, according to Edward M. Mazze, distinguished professor of business administration at the University of Rhode Island. The summer survey also found a 15 percentage point spike in companies suffering from a lack of skilled workers and a 14 percentage point jump in those identifying the cost of health care coverage as the top item to have increased in price over five years.

In its 17th edition, the PBN biannual survey was sent to 617 companies. The 77 companies that responded represent 11 Rhode Island industry sectors.

Each year, PBN turns to Mazze to help analyze the results. The summer 2016 results, he said, show the economy is on an upward swing.

IMPROVING ECONOMY

“By most economic indicators, the economy is better off than it was six months and a year ago,” Mazze said. “The unemployment rate has leveled off, the prices of homes have increased, and the days on the market have decreased. And automobile sales have risen.”

Taking a longer view, businesses have worked their way through almost 10 years of less-than-good economic times, Mazze added. “Growth is now slow and [owners are] sure to avoid past mistakes and an uncertain future brought about by the upcoming elections and world events.”

While PBN’s summer survey found a majority of businesses reported a higher level of employment compared to the previous quarter, fewer companies also appear to be planning layoffs.

Fourteen and nine-tenths percent of companies do not plan to hire new employees next quarter, a decline from 20.3 percent last summer. At the same time, there was a slight 3 percentage point increase in the number of companies not planning reductions next quarter.

But the cost of doing business in Rhode Island is still expensive, and the lack of qualified workers remains a persistent challenge, he said.

Mazze said the Rhode Island business market is made up of small and microbusinesses, often owned by families, and expansion is reliant on the ages of those in management.

“There is probably a relationship between the age of the owner and their desire to expand, buy capital equipment [and] hire additional people,” he said.

According to the U.S. Small Business Administration, in 2015 there were 23,012 small businesses employing Rhode Islanders, 20 percent of which employed fewer than 20 people and 19 percent of which employed 20-99 people. In total, 55 percent of the Ocean State’s workforce was employed by companies with fewer than 500 workers, which is what the SBA says is a small business.

By contrast, 35 percent of employees nationally worked at companies with fewer than 100 employees while 52 percent of workers were employed by companies with more than 500 employees.

Even as the number of respondents citing government fees and bureaucracy as one of their greatest challenges fell to 37.8 percent from 52.8 percent last summer, concern about government, and corruption in particular, is a constant in Rhode Island, according to Mazze.

“Most Rhode Island business owners want to be left alone,” he said. “They’ve already given up on all the promises they’ve heard through the election cycles in the state and local level. All they want to do is be able to operate their business on a level playing field.”

WORKER SHORTAGE

Another fundamental issue faced by business owners that Mazze identified was the shortage of qualified workers. In summer 2015, the survey determined 38.9 percent of companies found a lack of skilled workers to be one of the greatest challenges to running a business in Rhode Island. A year later that number climbed to 54.1 percent – the top challenge faced by business owners, according to the survey.

Mazze assessed the persistent skills gap as a result of, “the aging of the current workforce, an education system deficient in preparing students with the necessary skills in communications and technology for the work world, and the changing composition of an industry, namely, technology businesses and services that require a college-educated workforce.”

Three-eighths of companies that answered the survey said the cost of doing business in Rhode Island, as well as the red tape involved, was too high and named those as top issues for the state to tackle. Since last summer, the percentage of companies requesting the state to ease the hindrances of red tape grew from 49.3 to 64 percent, and those requesting tax incentives and credits from the state grew from 49.3 percent to 56 percent.

James Tice, owner of Pipe Dreams LLC in Warwick, was one respondent who said the state could be doing a lot more for businesses.

“I’m making moves to secure my future, and it’s not because I’m optimistic. It’s because I’m making sure I can stay in business for the long haul,” said Tice, who believes next year will be slightly worse than 2016.

Tice has seen many business owners leave Rhode Island, but he’s staying. “I’m personally at a point where if you’re going to stay, it’s because you love Rhode Island [and] you have to accept that this is what you deal with to do business. … This state wants and wants and wants, but it never wants to give back.”

John Sinnott, vice president and business unit leader of Rhode Island for Providence-based Gilbane Building Co., ranked second on the Top Private Company list in PBN’s 2016 Book of Lists, thinks the state and Gov. Gina M. Raimondo are working to relieve some of the pressure on businesses.

“Everything takes time,” he said, adding he’d like to see speedier permitting processes.

“When you don’t have a lot of money for grants, what you do have to do, because of the smallness [of the state], is facilitate and speed up the approval and entitlement process,” he said.

Edmund A. Restivo Jr., a managing partner at Providence-based accounting firm Restivo Monacelli LLP, says he’s seen some positive economic signs.

“I see increased [business] activity and, we see a lot of tax returns so, increased income,” he said.

COSTLY COVERAGE

But Restivo said many of his clients have been forced to delay or hold off on plans to hire because of the cost of health care. He estimated 10 percent of his clients were negatively impacted by increasing health care costs.

Since summer 2015 there was a nearly 14 percentage point jump, from 55.6 percent to 69.3 percent, in companies reporting health care expenses increasing the most as a percentage in the last five years. The survey found health care costs are the second-largest hurdle facing companies, with exactly half saying it’s a major hindrance to operation, although that represents a decline from 56.9 percent who made the claim a year ago.

Compounding the cost of health care and making it “very difficult, very competitive” to operate in Rhode Island is the lack of qualified employees, said Restivo.

“I think a lot of talented people, the millennial generation particularly, may want to go to Boston or New York. There’s a lot of activity in other parts of the country that are more attractive places to live and [more] competitive for compensation,” he said.

To increase growth in Rhode Island, Restivo suggests taking better advantage of the business park at Quonset Point in North Kingstown.

“Its location is right on the water, and they could use it as a port. It’s on the rails, it’s a great location for companies to relocate,” he said.

Martin G. Canavan, owner and president of Smithfield-based surveying company Canavan & Associates, agrees a lack of skilled workers is a problem in the state.

Though he is having a good year after a small “hiccup” last year, there are still not enough qualified workers locally.

“We thought with the slide from the recession it would be easy pickings to get qualified surveyors.” But, he said, the “decent ones” were lured away by opportunities at General Dynamics Electric Boat.

“I’ve turned down many jobs in the last year because I can’t find qualified crew chiefs,” he said.

Boston is a bigger draw, because even though land is more expensive, he explained, rent is significantly higher.

“If you’re going to invest and put up a building, with the long-term rent difference, put it in Boston,” where his company has worked on more than 30 projects in the last three years, he said. “The projects I work on [create] jobs too, because a lot of [them] are multiuse with retail on the bottom floor and condos above.”

Larry Willner, owner of Middletown-based Systems Engineering Associates Corp., also has experienced a lack of qualified employees. But he’s found some relief with the help of interns and state funding.

“The biggest thing we’ve been doing is hiring interns and giving them an opportunity to train with us,” said Willner, who hired 20 college interns this summer.

“Right now, there’s a fixed number of people on the island, and we don’t have new growth.” In order to get “degree people, you have to grow them from scratch,” he said of the company’s next generation of management.

After graduation, SEA Corp. offers full-time employment to half the interns hired every summer, explained Willner. The company has offered employment to interns for the past five years, but “this year was the biggest number of interns we’ve had. We’ll see what happens when they get out of school next year.”

In addition, for eight years SEA Corp. has applied for and received Incumbent Worker Training grants from the Governor’s Workforce Board of Rhode Island, which average $40,000 each, said Willner, and they have “improved [our] workforce significantly.”

Conversely, Christopher Graham, managing partner of the Providence office of Locke Lord, said the law firm has little trouble finding attorneys or qualified administrative staff.

While he doesn’t see the skills gap as an issue in his industry, he does recognize an overall brain drain in the state and hopes millennials might be the answer.

For now, though, summer 2016 survey findings show that businesses are spending and investing in equipment and employees, positioning themselves to take advantage of a slowly improving economy.

“Rhode Island businesses are sensing there is some growth in the local economy,” Graham said. “I think they want to ride that wave as it evolves.” •

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