The economy's skeptics

By Alex Gary

BusinessRockford.com

According to Paul McCann’s bottom line, there should be no talk of a recession.

He’s added dozens of clients in 2008 so far — even though his business, Stanley Steemer in Machesney Park, is largely dependent on homeowners with disposable income, something in increasingly short supply these days.

How has McCann thrived?

Survival.

His largest competitor went out of business at the end of 2007, and McCann has picked up many of that company’s clients. Nothing proves Darwin’s “survival of the fittest” theory, it seems, like a tough economy.

But many of his clients are struggling to keep up.

“We track a lot of things, and one of those is how people pay,” McCann said. “Credit cards tend to be a much bigger proportion in the pre-Christmas times, but we’re seeing an unusually high percentage of credit cards for this time of the year.”

McCann’s growth is a rarity in 2008. With rising fuel and food costs, and the struggles of the finance and real estate industries, business owners’ responses to the Economic Index surveys for the second quarter were the most pessimistic in the index’s history.

Northern Illinois University has been compiling the Rock River Valley Economic Index for the Rockford Register Star since 1999. The index surveys business owners in the manufacturing, service and retail industries on their expectations for the upcoming quarter.

In the service industry, 20 percent of respondents expected revenues to increase in the second quarter, compared with 26 percent who thought revenues would decline. It is the first time in the index’s nine-year history that service business owners who expected second-quarter declines outnumbered those expecting increases.

McCann started planning for a downturn last year.

“We’re a microcosm of what the economy is doing to small business. We contracted a bit in our hiring in our marketing,” he said, adding that he is cutting his marketing budget by 75 percent this year.

“I hope these checks for economic stimulus will provide exactly that, a stimulus. But we’ll wait and see. We’re expecting it to be tight all year.”

Retail
Perhaps the focal point of the economy is the retail sector, which is under pressure from rising oil prices because so many products are made, at least in part, from oil.

Still, the American consumer has continued to spend, keeping the wheels of commerce moving. Of course, more and more of that spending is through credit cards. According to Report Buyer, a business-trend Web site, the commercial credit market will grow 144 percent from 2004 to 2010, to $1.2 trillion in annual spending.

Locally, though, retailers are preparing for tough times. Thirty-five percent of those surveyed expected sales to increase from the first quarter while 50 percent expected sales to drop. In comparison, in the second quarter of 2006 — before the housing market slump — nearly 55 percent expected increases, and a little more than 9 percent were looking at declines.

The three owners of Roxy Carmichael in Rockford are a little more optimistic.

Sandee Irving, Kat Mitchell and Debra Aiello opened the women’s accessories store on North Alpine Road about eight months ago and have exceeded their sales goals each month. Irving, though, said they set very conservative goals for the year, and Aeillo said the economy is a topic of conversation among customers.

“I’ve heard people say they’re cutting back a little bit,” Aiello said. “And they’re conservative when they buy. Instead of buying several things, they are buying one or two. But they are still buying.”

Some of the shopping, Mitchell said, is to lift their mood: “Whether it’s purses, jewelry or whatever, a lot people come in and say, ‘I need a pick-me-up.’”

Manufacturing
The one area of the economy that retained a healthy level of optimism is manufacturing, still the backbone of the local economy, with more than 34,000 people in blue-collar jobs in Boone and Winnebago counties.

Of the companies surveyed, 25 percent expected to increase sales, and just more than 19 percent expected decreases. While the results weren’t as strong as the second quarter of 2007, manufacturing companies — except those supplying the automotive and home-building industries — making it through the downturn fairly well is critical for the area.

The last recession, which started here in early 2001 and didn’t really end until early 2004, cost the area 10,000 manufacturing jobs, according to estimates by the Illinois Department of Employment Security. It also was a blow to the area’s business psyche as well. Companies that were major employers for decades — Amerock, Ingersoll, Textron, Atwood and Motorola — moved, shut down, or went bankrupt and were sold off.

Still, Char Vincer of Riverside Spring Co. said many small manufacturers are in a precarious position because of rapidly rising steel costs. Her company, at 2136 12th St. in Rockford, makes small components for a variety of industries, including window finishing, recreational equipment, and lawn and garden equipment. Her steel costs increased 20 percent in May, and she was warned that it could increase another 20 percent in June.

Vincer said she will not be able to pass all of that on to her customers.

“Our customers will only take a couple of increments at a time. People say, ‘Well, just throw it at ’em because they’re going to have to learn to accept it.’ It doesn’t work that way for small manufacturing. A lot of us (have) to find ways to absorb some of it.”

The long-term worry is that if material costs continue to rise, shoppers will ultimately pay the higher prices. And if prices get too high, spending might drop no matter how much credit is available.

“We’ve just been all sitting there on the edge just wondering what’s going to happen,” Vincer said. “I don’t know if that’s going to be the cause and effect of the recession we’re talking about. I just know for me, as a person out buying things, I’m very selective on what I’m purchasing, and if the cost does mean a lot to me and I can’t afford it, I don’t buy it.”

Reach Assistant Business Editor Alex Gary at agary@rrstar.com or 815-987-1339.