Contributors
Founder and Chair – LMFC
Vice Chair – LMFC
President and CEO – LMFC
President & CEO – The Bank of Holland
SVP of Shared Services - LMFC

Hear from the founder of Lake Michigan Financial Corporation, Rich Lievense, and his insight on what this blog encompasses.

A recent theme of this blog has been the changing outsourcing patterns of American manufacturers.  A recent article discussed General Electric’s efforts to insource appliance manufacturing from China to Louisville, Kentucky.  The attached multi-article report provided a more comprehensive of these efforts and presents the opportunities and challenges to this important trend in American manufacturing.  It has important implications for our country’s growth and employment trends in the years to come. 

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I’ve spent much of the fourth quarter meeting with local business owners in an attempt to understand where the regional business sentiment is trending.  The global economy has plenty of headwinds, with Europe in recession, slowing growth in China, and everyone’s eyes fixed on the U.S. political and fiscal situations, but how are we feeling right here in West Michigan as we enter 2013?  I sat down with 50 local business owners to get their take.
 
First, let’s consider the past 12 months.  The main themes we’ve observed include the full return of manufacturing, the “convergence” of residential real estate and the “great wait and see”.  Manufacturing returned with full vigor in 2012, with most companies polled reporting double-digit growth in profits.  In-sourcing has played a major role in many of these recoveries as fall-out from the economic crisis has eliminated marginal competitors in many sectors and rising labor costs in Asia have caused several Tier Ones to source work back to the predictable United States.  The big winner seems to be the automotive supplier base, but growth across diverse manufacturing and service-based businesses was also observed.
 
The residential real estate convergence refers to the rise in existing home prices in West Michigan to levels that make home building viable once again.  It also relates to the relative affordability of home ownership as consistently low interest rates and rising rental rates make the prospect of buying a home more alluring.  At The Bank of Holland alone, we experienced a 36% increase in residential construction lending in 2012.  In the markets we track in West Michigan, home sales and average prices were up 15% - 20% and 7% - 9%, respectively.
 
As for the “great wait and see,”… well, I suppose we’re still waiting.  Throughout our interviews, the healthy optimism we witnessed was only dampened by uncertainty caused by the healthcare debate, the election and now the fiscal cliff negotiations.  Hopefully, by the time this article prints, that will be resolved as well.
 
The timing of this resolution is critical.  Of the companies polled, more than 75% planned to hire new employees and/or invest in new equipment and facilities to support growth in 2013, but many were hesitant and still await a resolution.  It’s important to note that these companies represent diverse industries, from various durable and consumer goods manufacturers to service businesses supporting healthcare, real estate, technology, and financial services.  Agriculture was also represented.  While anecdotal, the responses have been broad-based.
 
Heading into 2013, you may notice a shift in tone.  Here’s what we are preparing our business for:
  • Manufacturing continues, but at a cautious pace.  Many of our local businesses have international exposure, and the global risks cannot be ignored.  The wildcard may be the emerging U.S. advantage related to the cost of energy for production.  Those businesses able to capture market share may thrive, but others relying on economic growth are expected to slow.  This is still a positive view, but tempered by global overhang.
  • Residential construction continues to grow in 2013 as relative affordability, low existing home inventory and government assistance (low interest rates) drive activity.  The Bank of Holland is planning for 10% - 15% growth in this space in 2013.  Healthy, but not 2012 revisited.
  • Urban development remains alive and well.  Strong demand for downtown apartments has driven numerous in-fill redevelopment projects in downtown Grand Rapids, while new mixed-use construction projects anchor paths of growth to the north and south.  We expect these projects will promote spin-off development as Grand Rapids continues to establish itself as an urban destination.
  • Agriculture remains a key component of our economy, and West Michigan is well positioned in the region given its access to natural resources (irrigation).  Many of these businesses are conservatively managed, and we expect many regional growers and processors to move past the climate-related issues of 2012 and report strong 2013 results.
 
While the overall tone is one of optimism, we do see softness in a number of areas heading into 2013 and have heard consistent calls for concern in client interviews.  Specifically, West Michigan continues to struggle with talent attraction issues (high-skilled) and confusion related to the impact of the Affordable Care Act.
 
Our general concerns in terms of business sectors are relatively few.  Second-tier retail and suburban apartments are on the radar screen for 2013.  Retail (because it’s always a concern in lower-density areas in the age of the Internet), and suburban apartments may be the first victims of home affordability.
 
Our biggest concern in 2013, however, relates to what we call the “C&I (commercial & industrial) Bubble”.  In the prolonged low-interest-rate environment, banks are awash in liquidity and are competing fiercely to put their cash to work in the form of loans.  The result: historically low interest rates for businesses, with few strings attached.  The primary beneficiary of this competition has been the manufacturing sector.  The current environment resembles the real estate bubble of 2006-2007, and we all know how that ended.  Our concern is that in the face of real economic headwinds abroad, a blip in the growth trajectory in the United States could cause another knee-jerk reaction across several industries among some of the banks.
 
It’s clear from our client interviews that businesses have fully emerged from the financial crisis of a few years ago as leaner, more productive companies.  The only thing holding them back now is the inability to plan due to uncertainty in Washington.  We believe that growth and investment will accelerate once that uncertainty is lifted.  It is in this spirit that we hope and expect the West Michigan business community to drive growth in the region in 2013.  Hopefully, Washington is listening.
We have just watched our elected officials temporarily avoid the financial cliff by increasing taxes and not dealing with imbedded government spending.  We have kicked the can down the road again and insured that the drama experienced over the last couple of months will continue well into 2013.  The fundamental problem continues to be that we want more government than we are willing to pay for with taxes of one kind or another.  This problem is not unique to our national budget, but is being experienced at the state and local level throughout the country as well as Japan, Europe, and other countries around the world. 
 
It is easy to complain about our elected officials, but what would you do to address our $1 trillion + annual deficits if someone made you king/queen for the day?  Attached to this post is a interactive calculator from the Wall Street Journal.  See how your ideas work in addressing this ongoing problem.  This process will probably underscore the difficulty of the task given politician’s desire to get re-elected and the citizen’s desire to continue government programs that benefit them.  Remember, one person’s pork is another person’s benefit or right. 

Interactive calculator, provided by the Wall Street Journal.
Ken Rogoff and Carmen Reinhart have written a book titled ‘This Time is Different – Eight Centuries of Financial Folly’ about financial crises and debt bubbles that will be considered a classic.  It will be required reading in financial circles for years to come.  The only problem is that it is 292 pages of deep analytical work and takes a commitment to get through.  If you are so inclined to read it, you will not be disappointed.  If not, take a moment to read the following interview.  It will provide you the high level review of their thoughts and will certainly give you a perspective on our slow recovery from our most recent crisis. 

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