Minnesota businesses expecting second-half economic rebound
John J. Oslund and Patrick Kennedy
Star Tribune
Monday, June 11, 2001
The economic crystal ball may actually not be a ball at all, but rather a printed circuit board.
Years ago, Steve Jecha's father taught him that to know where the economy is headed, you just need to know how briskly printed circuit boards are selling.
As CEO of Precision Diversified Industries, a printed circuit board maker in Plymouth, Jecha is paying extremely close attention to that indicator these days. As circuit
boards go, Jecha says, so goes the technology sector and so goes the economy.
Since November, the numbers say things are slow. Very slow. In March and April, the "book-to-bill" ratio for the circuit board industry reached its lowest points since 1985.
But Jecha listens to the telephone, too, and customers are calling again with orders.
"I see it picking up in the third and fourth quarters," he said. "Picking up strong."
That puts Jecha among the vast majority of optimistic Minnesota business executives who feel the economy is experiencing a slowdown, but not a recession.
More than 94 percent of Minnesota companies surveyed last month by the Star Tribune and Business Wire said the economy is headed for a soft landing (slower growth)
rather than a hard landing (recession).That compares with 89 percent who answered the same question in December. The e-mail survey of 46 companies, ranging from
large manufacturers to small consultancies, was conducted the first two weeks in May.
Still, 42 percent say they have altered their plans because of the slowing economy. The same percentage said they have slowed hiring.
Asked specifically about employee head count compared with a year ago, about 30 percent of respondents reported they have cut workers; 32.5 percent said they've increased
payroll, and 37.5 percent said staffing levels at their companies have "stayed about the same."
Micro vs. macro
At the micro level, the responses often depend on the industry in which the firm competes. At Eden Prairie-based Augustine Medical, which makes medical devices, head
count is up. At business software maker ObjectFX Corp., head count is down. At Chestnut & Brooks, a Minneapolis law firm, head count is about the same.
In the macro economy, unemployment has crept upward since December in both Minnesota and the nation. Minnesota's unemployment rate in April, the most recent figure
available, was 3.9 percent, up from 3.1 percent in December. The nation's May unemployment rate was 4.4 percent, compared with 4.0 percent in December.
And signs of softness persist. Last week, nationwide claims for state unemployment insurance for the week ended June 2 rose to the highest level in nearly nine years.
On Thursday, Minnesota state economist Tom Stinson reported that corporate profits, individual income taxes and sales taxes all are down, which means state tax revenue
also will be down from earlier forecasts.
There are other signs of stress. At Voyagi Inc., a Minneapolis-based graphics and advertising production company, CEO Lief Larson reports clients today are typically taking
15 to 30 days longer to pay their bills compared with a year ago.
Moribund markets have inspired Techies.com, a Web-based job-posting service, to invoke the name of famed British economist John Maynard Keynes. The fiscal
stimulator's June 5 birthday was used to mark the kickoff of Techies.com's latest promotion -- a week of free job postings for companies who sign up by June 17.
The Web-based "e-cruiter" specializes in listings for technical professionals. So far, nearly 300 companies have signed up for a free week of posting their open positions, said
Techies.com Vice President Jeff Severts.
"The response to this promotion has been much more vigorous than we had expected," Severts said. "It suggests there are a lot of people out there who are hiring."
Severts expects a soft landing for the economy but "with a long runway ... [as] continued layoffs in technology companies and start-ups will prevent a quick recovery."
Financial insights
Galen Vetter, managing director of RSM McGladrey's Upper Midwest economic unit, said his clients are less willing these days to embark on ventures that promise fast
growth but require significant short-term losses.
The firm, which advises middle-market companies on mergers, acquisitions and financings, is seeing fewer deals than a year ago but "the quality of the deals is up
dramatically."
"Some of our clients have done quite well because of the movement by investors back to more traditional types of ventures," Vetter said, citing medical technology
companies in particular.
"We expect certain industries to experience very difficult times, such as companies supplying automobile manufacturers. Dot-coms have already experienced a hard landing.
In general, we expect most well-managed businesses will experience a soft landing. It may already have occurred."
How will the economy look by year-end? "I am looking for a strong fourth quarter -- not record-setting, but a strong quarter."
The crystal board
Meanwhile, at Precision Diversified Industries, Jecha is downright buoyant. Here's why: His company makes sophisticated circuit boards used by the research and
development departments at major electronics makers including Honeywell, Lucent and Motorola. That puts his company at the very beginning of electronics
manufacturing's food chain.
Jecha's business was strong through October, but new orders began to dry up in November. The industry's book-to-bill ratio is calculated by averaging the number of orders
booked over the past three months and dividing by the average sales billed during the same period. A ratio greater than 1 means new orders exceed current sales; less than 1
means business is going soft.
In March and April, the most recent figures available, the ratio was 0.70 and 0.63 respectively -- the lowest since 1985. A year ago in April, the ratio was 1.22.
As result of the winter slowdown, Precision laid off about 20 workers and now has about 110 employees.
But the phone is ringing again with new orders because his customers who were caught with too much inventory when the tech slowdown began have either sold the excess
inventory or written off their investments as obsolete.
Technology marches ahead, whether the customers are buying or not, Jecha explains. So circuit board designs tend to have a shelf life of only about two years (sometimes
less) before advances require a new design -- and, consequently, a new circuit board.
"The economy got too hot, major companies out there overbought inventory," Jecha said. "But electronics and technology are not going away.
"Our orders are going up and that's why I'm optimistic about the economy going up. ... Typically the economy follows three to six months after."
If Jecha is correct, expect a merry Christmas.
-- John J. Oslund is at oslund@startribune.com .
© Copyright 2001 Star Tribune. All rights reserved. |
