Most Rhode Island businesses are doing well and have positive outlooks for themselves and the economy for 2019, though their confidence is not quite as high as in recent years, according to PBN’s Winter 2019 Business Survey.
Though some responses were not as positive as in previous surveys, that shouldn’t be read too negatively, said Edward Mazze, a University of Rhode Island distinguished professor of business administration who helped develop the survey.
“Rhode Island is a state of generally small businesses and they remain optimistic. Where the percentages go down, you’re probably seeing fears of an [economic] slowdown,” Mazze said. “There’s talk of the possibility of a recession – I don’t see it.
“The unemployment rate is very low,” he continued. “Inflation has been very low. I think 2019 could be a great year for small businesses.”
Among the survey’s findings:
ACTIVITY SLOWING
• More companies reported business activity dropped late last year. This time 44.9 percent of companies said they did better in the current quarter than in the previous quarter. That was a decrease from 51.6 percent in last winter’s survey and 62.9 percent in the winter 2017 survey.
In addition, fewer companies expect to do better in the year ahead. About 61.4 percent said they expect 2019 to be better than last year. Though still positive, it was a decrease from 69.8 percent in last winter’s survey and 77.8 percent in the winter 2017 survey.
[caption id="attachment_255763" align="aligncenter" width="696"]
Profitable, yes; optimistic, less so:
While Rhode Island businesses continue to perform well as measured by 2018’s net income, current business activity and expectations for companies’ and the state’s short-term futures are at the lowest levels in years. / PBN GRAPHIC/LISA LAGRECA[/caption]
Some businesses, such as Automated Business Solutions, an office supplies, equipment and services company in Warwick, have been able to grow modestly by adapting to a changing market. The company has about 85 employees, mainly in Rhode Island, and hired two people in January. For years, the company has been gradually moving away from supplying office hardware to more information technology and computer software products and services.
“Since printers and copiers are on their way out, we’re trying to be paperless,” said Jennifer Thomson, the company’s sales support manager. “We keep acquiring little companies that have certain specialties. We’re trying to stay ahead of the game. We want to be a one-stop shop” for office equipment and services.
• A lower portion of companies reported an increase in new business orders compared with the previous quarter: 45.7 percent reported increases – the lowest percentage among the previous four surveys covering the past two years, and down from 65.5 percent in last summer’s survey.
Trans-Tex LLC, a Cranston-based manufacturer of decorated textiles, lanyards, seatbelts for infant diaper-changing stations for store restrooms, and sports merchandise, was expecting business to slump when it recently filled out the survey. But business in January turned out to be better than expected, said Adrien Hebert, the company’s co-owner and chief financial officer.
Hebert and partner Phillip Barr have grown the company since buying it in 2005, when it had just 12 employees. But they are concerned about efforts to gradually raise Rhode Island’s minimum wage to $15 an hour in coming years. And Hebert called utility costs for businesses in Rhode Island “ridiculous.”
They already outsource some work to North Carolina, where labor and utilities are less expensive. Hebert said they would have moved the company out of Rhode Island, but they are too close to retirement to want to make the move.
“If we were in our 50s, we’d move the company down South in a heartbeat,” he added.
Trans-Tex has between 70 and 85 employees, depending on the flow of business. Most of the workers are assemblers, who start off at the state’s minimum wage, which increased to $10.50 an hour in January.
Hebert said his company often competes with similar manufacturers in China that pay workers $3 to $4 an hour. His company usually can’t compete on prices with the Chinese, but it has the advantage on quick orders – when a domestic customer needs product delivered within a day or two. The Chinese, he said, are simply too far away to respond that quickly.
Another advantage: “We serve some customers who tend to want to buy American,” he added.
Though not scientific, PBN’s biannual surveys provide a window into what various local companies are going through. The surveys query business owners and top managers. Seventy businesses responded to the 2019 winter survey, which was sent to about 650 businesses in January.
Mazze said, “All [economic] indicators are positive. But that could change with a tweet [from President Donald Trump]. We have new tax regulations taking effect. There’s a Democratic majority in the [U.S.] House. That will provide a better check and balance. The fear before [with a Republican-controlled Congress] was there could be all sorts of proposals.
“Businesspeople want to make sure government is consistent and fair,” he added.
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Back to basics: With less optimism in general about their prospects going forward, it seems that local companies are more focused on cost containment – especially health care costs – than bigger-picture items, such as finding qualified workers and navigating the red tape of government.
* Government fees/bureaucracy combines answers from most recent survey for state government fees/bureaucracy and town/city government fees/bureaucracy and eliminates duplicate answers. / PBN GRAPHIC/LISA LAGRECA[/caption]
HEALTH CARE
Health care costs have become the most common concern among businesses, according to the winter survey.
Overall, 60 percent cited the cost of health care among their greatest challenges. That increased from 37.5 percent two years earlier, when health care costs were well down the list of concerns.
Some business owners contend their health insurance premiums have been too high under the Affordable Care Act, commonly referred to as “Obamacare.” As Mazze sees it, businesses have watched largely Republican efforts on the federal level to “undo” Obamacare and they’re nervous about what could replace it.
“All the press has been talking about are cost increases in the health care market,” Mazze said. “It’s complex and it’s difficult to get people to understand it. … For entrepreneurs, offering health care [to their employees] without Obamacare is extremely difficult and expensive for them.”
Despite being among the largest health care companies in Rhode Island, Care New England Health System is concerned about rising health care costs for its more than 7,700 employees, nearly all of whom work in Rhode Island. An unusually large number of employees suffered “catastrophic” illnesses, driving up the company’s health care costs, said Joe Iannoni, chief financial officer for Providence-based Care New England.
“We’ve seen a lot of large claims,” Iannoni said. “There’s only a small percentage of employees with catastrophic illnesses. The average number is about 10 a year, but we got about 40 in one year.”
Another concern, companies report they are paying more for materials and supplies.
Overall, 62.5 percent said their costs for materials and supplies have increased, compared with 48.4 percent in last winter’s survey.
“Prices for structural steel, concrete and dry wall have all gone up because of the construction boom,” said John Sinnott, vice president and Rhode Island business unit head for Gilbane Building Co., a national construction and property-development company based in Rhode Island.
Although Gilbane expects business to improve this year, the company plans to raise prices because of increased costs.
“We have to raise our prices,” Sinnott explained. “With the [rising] cost of labor, we’re competing with other construction companies for our own people. We still have to show some sort of a return.”
Gilbane has more than 2,900 employees nationwide, including about 300 at its Providence headquarters.
After a strong year in Rhode Island in 2018, Gilbane expects business to stay about the same this year. In Rhode Island, the company’s business is being aided by government-funded projects such as the expansion of General Dynamics Electric Boat’s facilities at Quonset Point in North Kingstown and in nearby Groton, Conn., as Electric Boat ramps up construction of the next generation of nuclear-power submarines for the U.S. Navy.
In addition, Gilbane is working on public-school construction projects in Providence and surrounding communities.
“That work will last at least five years, which is tremendous,” Sinnott said. “When there’s public investment, it benefits the community. But it also provides jobs in the building trades. We try to hire Rhode Island subcontractors.”
[caption id="attachment_255765" align="aligncenter" width="696"]
Still investing: Despite the lack of optimism, companies are not slowing down in their intention to invest in their businesses, either in human capital or big-ticket items. / PBN GRAPHIC/LISA LAGRECA[/caption]
One of Gilbane’s main concerns is finding qualified workers.
“After the market crashed in 2008 and 2009, a lot of people left the [construction] industry. We also have an aging workforce,” Sinnott added. “So, we’re focusing on bringing in new, young blood.”
While businesses always have concerns, positive responses far outweighed negative ones in this winter’s survey.
Analyzing the results, Mazze prefers to combine positive and neutral responses into one category and compare it to negative responses because simply maintaining business, let alone increasing it, can be a positive for many small businesses competing against larger national and international companies.
For example, when asked to describe their business outlook for this year compared with last year, 61.4 percent expect this year to be better and 27.1 percent expect it to be the same. Only 11.4 percent expect this year to be worse. From Mazze’s perspective, that means 88.5 percent expect a relatively good year.
While the 11.4 percent anticipating a downturn may seem small, it was a higher percentage than the four previous surveys, when only 2 or 3 percent expected a downturn.
Business owners may be getting spooked, Mazze said, by the ongoing uncertainty over matters with a national or global economic impact.
“A lot of tariffs and trade agreements” between the United States and other nations “are in a state of flux,” he said. “There have been rising interest rates.”
Regarding government’s impact on business, the survey found that fewer companies listed state and local government fees and bureaucracy as challenges to operating their business in Rhode Island.
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READY FOR DELIVERY: Stephen Hay, left, warehouse manager at Automated Business Solutions, and Rocky Collum, driver, load machines into the van for delivery. The company sells many types of office materials, supplies and some services, including information technology.
/ PBN PHOTO/MICHAEL SALERNO[/caption]
BUSINESS FRIENDLY
For instance, 38.6 percent checked off costs and “red tape” from state government as a problem in this winter’s survey. That was the first time that number dipped below 40 percent in two years. Meanwhile, only 28.6 percent checked local government as presenting such problems – also the first time in two years that number fell below 40 percent.
“There’s no question that some of the optimism in Rhode Island comes from the governor [Gina M. Raimondo] and the legislature being more business friendly,” Mazze said. “On the local level, it’s better. On the federal level, it’s unknown.”
[caption id="attachment_255766" align="aligncenter" width="696"]
Government viewed more positively: Rhetoric about how effective – or not – state and local governments are toward business is oftentimes negative. But the results of this survey show a moderating opinion toward issues that include taxes, red tape, workforce development and incentives. The one issue that still seems to stick in the craw of business is the cost of doing business in the Ocean State. / PBN GRAPHIC/LISA LAGRECA[/caption]
Among other highlights of the survey:
• Overall, 54.3 percent of businesses reported an increase in their employment in the current quarter from the previous quarter. That was about the same percentage as in PBN’s winter and summer surveys of 2018. But it was an increase from 38.9 percent in the winter 2017 survey and 45.8 percent in the summer 2017 survey.
In addition, 59.7 percent of businesses said they planned to hire in the next quarter. That was about the same percentage as in the 2018 and 2017 surveys. And 88.4 percent said they do not plan workforce reductions in the next quarter. That was a slight decrease from previous surveys, while the percentage saying it is still under review was slightly higher.
Vision 3 Architects Inc. in Providence is looking to expand its staff of 32 people with an extra architect and architectural designer after adding six employees last year, said Keith Davignon, the firm’s president and CEO.
Davignon said last year was the second-best in the firm’s 32-year history and he expects business to stay about the same this year. But he said a concern is that rising construction costs will cause some clients to cancel or scale down building projects, creating less demand for architectural services. As Rhode Island’s job market has expanded in recent years, another concern has become rising labor costs.
“It took a lot of time after the recession for labor costs to go up, but we’re definitely seeing it now,” he said. “We’ve been seeing it in the last two years, especially in the last year.”
The firm mainly takes on work from commercial building jobs. Its biggest job was designing the new corporate headquarters in Johnston for insurance giant FM Global, completed in 2009. Currently, among the firm’s biggest projects is the 140-room Marriott Residence Inn being built across the street from the R.I. Convention Center in downtown Providence.
“Our focus is office buildings, a lot of corporate office interiors, medical office buildings, private schools and universities, and a little retail,” Davignon added.
• Overall, 34.8 percent of businesses were planning to make a “big-ticket” purchase such as capital equipment in the next quarter. That number was slightly higher than previous surveys. In addition, 22.1 percent plan to expand facilities in the next quarter. That was a slight increase from the 2018 surveys, roughly the same as the summer 2017 survey and a slight decrease from the winter 2017 survey.
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SALES SUPPORT: Jennifer Thompson is the sales support manager at Automated Business Solutions, a company that sells a variety of office materials and supplies, as well as some services, including information technology. / PBN PHOTO/MICHAEL SALERNO[/caption]
• Concerns among businesses about corporate taxes have subsided since federal legislation was approved in December 2017 that cut the corporate tax rate nearly in half. Only 29.2 percent said eliminating the corporate tax is something they want from government. That was a decrease from 74 percent two years ago.
“The lower percentage [this winter] reflects the [2017 federal] tax rate cut,” Mazze said. “It also could reflect the possibility of that being discussed by the state legislature” in Rhode Island.
• The survey found 52.9 percent of businesses expect the Rhode Island economy to improve slightly in 2019. That number has gradually dropped in each of the last four surveys, dating back to the winter 2017 survey, when 70.8 percent expected the state’s economy to improve slightly over the next 12 months.
Care New England expects 2019 to be a better year financially for the company. It cut costs by closing the unprofitable Memorial Hospital in Pawtucket last year. The hospital pulled down the company’s financial condition, which has limited its access to capital. But the company is moving toward more outpatient treatment and plans upgrades in diagnostic testing and patient-monitoring equipment, among other initiatives expected to improve the company’s financial standing.
“The [financial] losses from Memorial Hospital are behind us,” Iannoni said. “Although we’re improving our operations substantially … changing the balance sheet takes a while.”
Scott Blake is a PBN staff writer. Email him at Blake@PBN.com.