If and when the country will slip into a recession depends on who you ask, but the gloom is already settling over Rhode Island companies nonetheless, according to Providence Business News’ 2023 Winter Business Survey.
Only one of every three business owners and executives who responded to the biannual survey expect to see improvements in the state’s economy in the year ahead – the lowest level of optimism in the survey since 2008, at the height of the Great Recession.
And the dark view of the future is seeping into their businesses. Nearly 12% of respondents say they expect their company will perform worse in the year ahead – three times the percentage who felt that way a year ago. And while 46% foresee a brighter 2023 for their business, it’s the least buoyant response to this question in PBN’s biannual survey in 15 years.
Who can blame them for feeling glum?
Stubbornly high inflation and supply chain slowdowns have nearly 9 in 10 companies paying more for materials and supplies, according to the survey – results that remain nearly unchanged since last winter. Workers remain difficult to find and hard to afford, with the salaries of new hires identified in the survey as the biggest increasing expense over the last five years.
All of this has led to thinning profit margins for many, with one-fourth of respondents – 25.5% – reporting net business income lower than a year ago. By comparison, 17.5% reported shrinking profits in the Winter 2022 Business Survey.
Indeed, the confidence of the business community continues to dwindle. But perception, more than reality, might be at the root of the pessimism, according to Edward M. Mazze, a University of Rhode Island distinguished professor of business administration who helped develop the biannual PBN survey.
“Over the last six to eight months, there has been a lot of discussion about a recession,” Mazze said. “That’s going to affect how people view the economy. I think many of these businesses have started preparing as though there is going to be a recession.”
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PAIN POINT: Dr. Andrew Gazerro, a dentist who owns a practice in West Warwick, says the state is headed for a crisis if it doesn’t start offering dental insurance reimbursement rates that can compete with neighboring states.
PBN PHOTO/ELIZABETH GRAHAM[/caption]
CHANGE OF DIRECTION?
The PBN survey, which has been conducted twice a year since 2008, is not scientific. PBN sent 22 questions to 1,151 businesses in the newspaper’s database. One hundred and eleven responded, representing a span of industries from banking and manufacturing to hospitality and health services. A few employ more than 1,000 people, but most are small and midsize companies.
The latest survey results indicate that recession fears have business owners and executives reassessing strategies for 2023.
After looking to add workers in the economic surge following the worst of the COVID-19 shutdowns, some companies now have grown skittish about hiring. While nearly six of every 10 respondents – 59% – were ready to add workers in the Winter 2022 Business Survey, just 44% are planning to do so as of the latest survey.
Companies are losing interest in expanding their facilities, too. More than 75.5% of those surveyed said an outright no to an expansion in the next quarter, a number that has climbed from 68.4% a year ago, and 70.8% last summer.
At the same time, just over half – 52.7% – said their company has no plans for big-ticket purchases, up from 44.3% in winter 2022 and 46.7% in summer 2022.
It goes back to the drumbeat of headlines and incessant talk about inflation and rising interest rates, according to Mazze.
“Everybody has heard about inflation at this point, and many people are seeing this in terms of what’s happening with interest rates,” Mazze said. “That definitely has an impact on spending.”
It didn’t stop Robert Wheeler from making a big-ticket expenditure.
Wheeler, co-owner of Friends of Toto Inc., spent about $400,000 last year to expand his Pawtucket dog day care, doubling the space and adding services such as a self-serve dog wash station and retail area.
The work was finished in November, and now Wheeler is waiting to see a return on his investment in the form of more and happier customers.
Wheeler’s business experienced a boom during the pandemic when people working remotely were adopting dogs to keep them company. The day care quickly filled to capacity with new canines, but that came with its own problem: some regular customers weren’t happy that they could no longer drop off their dogs at a minute’s notice.
The expansion from 10,000 to 19,000 square feet lets Wheeler accommodate customers who want last-minute drop-offs, but the investment ended up being a bit more than Wheeler expected because of rising material and labor costs. He found the process nerve-wracking.
“Like every other small-business owner, you have to learn to be an expert in everything,” Wheeler said. “Now, when you do something like this, you have to know about architecture, HVAC, plumbing, all these things that you used to always take for granted. It definitely added a layer of stress.”
Now he’s got a new reason to stress: he needs more clients and more revenue to cover the construction costs. “The reality is, I’ve got the capacity to take 60 more dogs, so I need to get 60 more dogs in,” he said.
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Buckling in
Fewer businesses are seeing quarterly gains in business activity than at any time since the Great Recession. Net income remains stable from the summer but is still down from a year ago. Meanwhile, confidence in the Rhode Island economy is at its lowest point since Winter 2008.[/caption]
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Ups and downs
A shortage of qualified workers continues to be the biggest challenge to operating a business in Rhode Island, but after rising sharply a year ago this concern has dipped closer to historical levels. The cost of health care, on the other hand, is on the rise again after falling last summer to its lowest level since PBN began conducting the biannual survey in 2008.[/caption]
Wheeler also needs to find more workers to supervise those 60 extra dogs. But he can take solace in the indications that the tight labor market may be abating.
Early signs include high-profile companies such as Microsoft Corp., Amazon.com Inc. and Salesforce Inc. announcing layoffs in the opening weeks of the year. Businesses that provide temporary workers have also started cutting jobs, according to the U.S. Department of Labor’s December jobs report, a development that some economists consider a signal of future labor market shifts.
In Rhode Island, layoffs aren’t in the plans yet for most companies – just 2.7% of respondents to the PBN survey say they foresee cutting workers next quarter.
But fewer are lamenting the shortage of qualified workers. Six in 10 say it’s a top problem, compared with three-quarters of those surveyed in the Winter 2022 business survey.
That might be because after months of aggressive recruiting, they’ve finally reached the staffing levels they need.
Not so for SEACORP LLC. Flush with federal naval defense contracts, the Middletown engineering services company remains on a hiring spree. The company set aside money to hire 150 workers this year, after adding 139 people in 2022, according to John Laurent, human resources manager.
That’s nearly double the 80 people who would be hired in a typical year, Laurent says. And it’s been tough to find the computer science engineers who make up most of SEACORP’s 500-person workforce.
They’ve hired a second recruiter and sweetened benefits, such as adding floating holidays.
The biggest change in hiring came with more flexibility in federal contracting rules.
The government waived its rule against remote workers on contract jobs at the height of the COVID-19 pandemic, a change that has remained after the crisis subsided.
Now SEACORP isn’t constrained by geography when looking for candidates at its Rhode Island, Connecticut and Virginia sites. Case in point: the company just hired a subject matter expert in electronic warfare who lives in Washington, D.C. SEACORP didn’t have to persuade him to move or reject his application, Laurent says.
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ROLLING ALONG: Frank Costa, left, a senior machine operator, and Greg Viera, machine operator, work on the manufacturing floor at Trico Specialty Films Inc. in North Kingstown. Unlike other businesses worried about a downturn, Trico has made moves to expand its business.
PBN FILE PHOTO/ELIZABETH GRAHAM[/caption]
STOCK PROBLEMS
One repercussion still plaguing some businesses is a snarled supply chain and the headaches that come with it.
A growing reluctance to rely on supply chains that stretch around the globe is clear. Only about one quarter of survey respondents said they deal with international enterprises now, down from 36% a year ago. And 8% were planning to decrease their overseas business, compared with 0% in the Winter 2022 Business Survey.
No wonder. Everything costs more, and delivery dates can be unpredictable, if items come at all. Just ask Harry Adler, president of Adler’s Design Center and Hardware.
The hardware store in the Fox Point section of Providence saw wholesale prices skyrocket after COVID-19 hit, and for the most part, they haven’t come back down.
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Proceed with caution
Ongoing concerns about inflation and the possibility of a looming recession may be affecting short-term hiring and big-ticket purchasing plans. Both are down to levels last seen in 2021.[/caption]
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Help wanted
Concern over too much governmental red tape dropped sharply last summer but bounced back to historically high levels this winter. Reducing the cost of doing business in the state continues to be the No. 1 area business leaders would like to see state government address, though it has dipped over the last six months to 6 in 10 respondents.[/caption]
As a local family business and member of the Ace Hardware Corp. cooperative, Adler’s relies mostly on regional suppliers so the store isn’t dealing with overseas shipments. Even so, there have been frenzied phone calls to suppliers when inventory runs low only to find out long-favored brands or size options are discontinued or out of stock.
At one point, paint suppliers stopped selling quart and 5-gallon containers amid resin shortages during the 2021 Texas power crisis. Now, Adler orders the 1-gallon option, then pours 5 gallons into a new container so he can still sell the 5-gallon product that many customers want.
“It’s a lot of tap dancing,” he said. “It adds stress to the day.”
Also, the prices the store is paying for paint are up 20% to 40%, and Adler has had no choice but to pass it on to customers.
He is not alone. Three in 10 survey respondents plan to raise prices in the next quarter, about the same percentage as a year ago.
Adler hasn’t gotten much blowback from charging more, partly because of what he sees as a newfound appreciation for supporting local businesses. That and the home renovation boom that began during the pandemic means paint and hardware are in high demand, no matter what they cost.
“If you eat every price increase, you’re not going to survive,” he said. “The other choice is to not be in business.”
MOVING ON
In some ways, the effects of the pandemic on businesses have lingered. In other ways, they’ve faded surprisingly quickly.
About 2 in 10 survey respondents say the pandemic will have no long-term impact on their companies, nearly three times the percentage who said the same thing a year ago. At the same time, only 36% say the pandemic has permanently changed the way their business operates, down from 66% a year ago.
Maybe it’s because the new economic headwinds have swept away the pandemic problems. Or they’ve acclimated to the way COVID-19 has changed their business, Mazze says.
“Over the last 20 years, it’s always been about survival of the fittest,” Mazze said. “That has not changed.”
Trico Specialty Films Inc., the North Kingstown manufacturer, is planning to expand its customer base domestically and abroad, after buying a second factory a year ago.
The purchase of the 40,000-square-foot facility from Toray Plastics (America) Inc. allowed Trico to boost its offerings from two types of plastic films to three, and in turn, expand its customers, according to Paul Conforti, the chief financial officer. The manufacturer caters to a wide array of buyers, from graphics and signage companies to medical packaging businesses and wire and cable companies.
Still, the expansion came with growing pains. Most of the 30 workers Trico hired to work in the new plant had no experience in the specialty plastics extrusion and plastic film manufacturing. A few Toray employees stayed on during the transition to help train the new hires on the basics of the machinery, but at some point “the training wheels had to come off,” Conforti said.
Which created some initial quality problems, but “nothing catastrophic” and the company was able to work out the kinks with the customers, Conforti said. Trico’s approach? Take it slow, do it right and learn. Eventually, the company picked up the pace of production, which offsets the higher labor costs from more and better-paid employees, Conforti says.
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Muted optimism
Looking ahead, less than half of respondents expect their business to be doing better a year from now. That’s holding steady from the summer but is at its lowest level since the Great Recession.[/caption]
THE CHALLENGES
While the shortage of qualified workers ranked highest among business challenges faced by survey respondents (61.7%), health care costs continue to bedevil businesses, as they have in most PBN surveys since 2008.
Forty-three percent of survey takers said health care costs are their greatest challenge, ranking it as the second-most frequent response in the survey.
Dr. Andrew Gazerro, a dentist, has his own challenges with health care costs, but they’re not quite what most employers face.
Gazerro, who owns a dental practice in West Warwick, laments the low reimbursement rates of in-state dental insurers. Delta Dental of Rhode Island, the predominant provider, had not increased its reimbursement rates in 13 years until it finally did last year, according to Gazerro.
Even then, the rates that increased were either so minimal – $2 more for a cleaning – or for very rare procedures that it didn’t help him much. Meanwhile, his practice’s expenses, from gloves to dental hygienists’ salaries, are surging.
And unlike a typical business, he can’t pass it on to customers, at least not those who have insurance.
“It creates this environment where I have to balance this reimbursement,” Gazerro said. “There are only two ways: decrease the time it takes to do a procedure so I can do more procedures in a shorter period of time, or use less-costly materials.”
He’s unwilling to sacrifice quality for quantity, and with inflation, even less-costly materials are expensive.
“At this point, we’re just eating 40%-50% of the cost,” Gazerro said.
He’s tried to take on more elective procedures such as dental implants and other cosmetic work that insurance companies don’t cover. And he’s increased fees for his uninsured patients, who make up about 20% of his 1,200-patient roster.
Gazerro warns that the state is heading toward a crisis if it doesn’t start offering reimbursement rates that can compete with neighboring states.
His beef with insurers also extends, partly, to state lawmakers for not passing policies that would require better reimbursement rates.
Gripes with the government are historically popular among Rhode Island companies, though it has diminished in recent surveys as other concerns such as worker shortages take precedence. Just over one-third of those surveyed named government fees and bureaucracy as the biggest challenge to doing business in Rhode Island, down from 43% a year ago.
Mazze wasn’t surprised that companies still like to point the finger at government leaders but also said that Gov. Daniel J. McKee’s small-business focus may have softened their criticism.
“He’s very highly regarded in the business community,” Mazze said. “Our elected officials are much more concerned about supporting the small-business community these days.”
Still, it’s apparently doing little to ease the fears about a coming recession. Mazze figures it’s going to take at least a year before those anxieties fade.
A year?
“The next survey [six months from now], I think we will be in the middle of a recession,” he said.
