By scrolling down this page, you will find sector updates/forecasts provided by various industry leaders offering their perspective and predictions of what 2013 has in store for their industries and the Badger State.

Banks becoming stronger, consolidation on the rise
By Rose Oswald Poels, President & CEO Wisconsin Bankers Association

Financial institutions will continue to improve from a profitability standpoint throughout 2013; however, earnings pressures will also continue to challenge the industry.

Through the third quarter of 2012, Wisconsin’s state-chartered financial institutions continued to show improvement in several key measurements signaling continued strength in the industry. More than 92 percent of Wisconsin’s financial institutions were profitable through the third quarter with more than two-thirds showing earnings gains over the prior year. These improvements in the industry coupled with the decrease in consumer debt are evidence that the economy in Wisconsin continues to stabilize.

Nationally, there continues to be improvement in the industry with more than half of all financial institutions (57.5 percent) reporting higher quarterly net income in the third quarter compared to a year ago. This quarter was the 13th consecutive quarter that earnings have registered a year-over-year increase. Also noteworthy was a decline in the number of banks on the FDIC’s “problem list” from 732 to 694. This is the sixth consecutive quarter that the number of “problem” banks has fallen and the first time in three years that there have been fewer than 700 banks on the list.

A diverse, healthy banking industry is critical to the overall success of Wisconsin’s economy and the growth of our local communities. Financial institutions play a big part in helping individuals grow and prosper and small businesses get started and expand. Financial institutions also contribute thousands of dollars to local civic, charitable and other groups, and bankers donate countless hours of time to volunteer in their communities.

Even with these positive trend lines both nationally and at the state level, the financial institution industry is facing steady headwinds. Regulatory burden continues to grow unabated and the expenses are disproportionately affecting community banks. There are seven pending federal rules alone affecting the mortgage lending business that are expected to be finalized and effective in 2013. This is in addition to other regulatory changes affecting the overall compliance burden of financial institutions. These compliance burdens add nothing other than bottom line expense to the overall balance sheet of financial institutions while providing limited real value to consumers.

New capital rules proposed as part of the BASEL international accord (referred to as BASEL III) will also place great burden on community banks if they are finalized as drafted. The BASEL III rules were thought to be primarily aimed at those financial institutions with international, complex operations. Instead, the rules affect every single financial institution including the smallest community bank. Financial institutions have always had to follow capital rules, setting money aside for periods of negative earnings. However, there is no explicit justification provided in the BASEL III rules to support higher capital standards on community banks that, by themselves, pose little risk to the overall economy. Yet the potential negative impact of these rules on community banks is significant.

Rising expenses coupled with earnings pressure and capital challenges are expected to result in more consolidation in the industry. This trend is starting to occur again in Wisconsin with six acquisitions announced in 2012 alone. It is likely that we will see at least the same number announced in 2013. While consolidation in the industry has always occurred, it did so at a much slower pace over the last decade than what is expected to occur over the next several years.

All of these divergent forces support the forecast of continued strength in the financial institution industry yet a continuing decline in the overall number of Wisconsin banks.

A Strong 2012 for Housing, but Key to Sustained Growth is Still Economy
By Michael Theo, President and CEO
Wisconsin REALTORS® Associatione

The Wisconsin economy, like the national economy, has shown little improvement over the past year. The national growth of real GDP was just 1.7 percent for the first half of 2012, and the initial estimates of third quarter real GDP growth were 2 percent. This has kept the seasonally adjusted national unemployment rate ranging from 7.8 percent to 8.3 percent through the first 10 months of 2012. The comparable Wisconsin rate has ranged from 6.7 percent to 7.5 percent over the same period. In October, the Wisconsin rate stood at 6.9 percent, a full percentage point lower than the national rate but it is still well above full employment levels.

In spite of the weak growth in the state and national economies, the Wisconsin housing market has seen solid growth in existing home sales after the Great Recession. The rebound in home sales began in the second half of 2011, and it has continued for 16 straight months as of Oct. 2012. Sales of existing homes in the first 10 months of 2012 were up 20.5 percent compared to that same period in 2011. This has finally begun to put a dent in the state’s inventory of unsold homes which fell 21.9 percent over the last year. Given the annual pace of sales in Oct. 2012, this means that it would take approximately 10.2 months to liquidate that inventory. Although this remains above the benchmark of 6 months that typifies a balanced market, it is well below the peak of 18.4 months which was seen when the Great Recession officially ended in June 2009.

Wisconsin home prices have been stable because we didn’t experience a bubble like other states. One way to gauge housing price changes is to evaluate changes in the constant quality Housing Price Index published by the Federal Home Finance Agency (FHFA) which statistically controls for home quality in their index. The FHFA index shows that Wisconsin housing prices peaked in the second quarter of 2007, and then fell 12.5 percent, hitting the trough in the fourth quarter of 2011. The Wisconsin Housing Affordability Index, which measures the percentage of a median-priced home that a buyer with the median family income can afford, stood at 254 in October 2012, which is 5.7 percent higher than the same month last year.

Usually deep recessions are followed by robust job growth as the economy recovers. So why is this economy still so weak more than two years after the recession officially ended? Part of the problem is the issue of uncertainty resulting from the election cycle and that has now been settled. However, the future costs of the Affordable Care Act (Obama Care) law remain uncertain, which will likely cause some employers to avoid expansion in the near term.

There is no doubt that the Wisconsin housing market has been rebounding in spite of the sluggish national economy. Record low mortgage rates have helped the housing market, but policymakers need to work toward a goal of stronger job creation. Our national elected officials need to finally decide on tax and expenditure levels before businesses have the confidence to invest in growth and consumers have the confidence to invest in major purchases like a home, both of which are needed to turn this fragile recovery into a robust recovery.

Tired Home Builders are a Good Economic Indicator
By Jerry Deschane, CAE, Executive Vice President
Wisconsin Builders Association

Talk to home builders these days and you’ll hear a common refrain: they’re busy and tired from scrambling to keep up. That’s a positive sign for Wisconsin’s economy on three levels. Busy builders means there’s growth in the construction economy. It also means that Wisconsin’s concentration of construction-related manufacturers will start to see growth. Finally, busy builders will soon have the confidence to start hiring again and jobs are what an economic recovery is all about.

A construction and remodeling recovery is clearly underway. While the inventory of existing homes is still higher than what would be considered healthy, the stock of new homes is almost nonexistent in most markets. If you want shiny new cabinets and the “new home smell” of fresh paint, you’re going to have to build it. According to the National Association of Home Builders (NAHB), customers are steadily moving back into the new construction market. Permits for new construction continue to rise in markets all over the country. NAHB’s forecast for 2013 is a 25.5 percent increase in the number of new single-family housing starts compared to 2012. In dollar volume, home remodeling is doing even better and remodeling will be a significant economic driver in Wisconsin for years to come as the state’s older-than-average population forces us to adapt the housing stock to the needs of the not-so-nimble.

Both Congress and the Wisconsin legislature are expected to consider changes to the tax system in 2013. The deduction for mortgage interest is an important government incentive for housing and it’s also a juicy revenue plum, so trimming it will be tempting for money-hungry politicians, but dangerous for the continued economic recovery. At the state level, efforts to reduce income taxes should include property tax reform, since the property tax takes the biggest bite out of both personal and business wallets. On the regulatory side, we expect a stream of new federal banking rules that could put the brakes on the economic recovery.

An under-appreciated side of the home construction and remodeling industry is the impact it has on Wisconsin manufacturers. Wisconsin is home to many companies that make construction materials, from name brands like Kohler and Trane to the more-numerous but less-obvious window and door manufacturers that employ hundreds of people in small communities all over Wisconsin. Construction-related manufacturing is a large part of Wisconsin’s economy, and the nationwide housing recession took an oversize bite out of that workforce. The anticipated 25 percent uptick in housing starts cannot help but boost Wisconsin manufacturing employment.

Which brings us to the final point. Employment in the construction industry will increase in 2013. It must. Builders and remodelers cut to the bone in order to survive the Great Recession. The sector lost 25 percent of its workforce. Builders are seeing increases in contracts, but have been holding off on rehiring out of a deep sense of caution learned in the lean years. Builders have been hesitating to hire while they build back their own balance sheets, but the workload is starting to pile up. Builders will soon have to choose between hiring and turning away customers. After the last five years, few builders will choose the second option.

Lack of Rain, Farm Bill Continue to Impact Agriculture
By Roger Cliff, Chief Administrative Officer
Wisconsin Farm Bureau Federation

This year was challenging for most Wisconsin farmers because of the severe drought that occurred over the summer and early fall. Crop yields were generally down across the board and forages for feed were in very tight supply. These conditions triggered dramatic increases in the prices of corn, soybeans and hay. Dairy and livestock farmers will continue to face high feed costs for at least the first half of 2013.

Dairy farmers have been trying to recover from 2009’s deep economic downturn when milk prices dropped about 40 percent in the span of a year. Progress had been made but now soaring feed prices are once again pushing dairy farmers to the financial brink.

Ironically the high feed prices brought about by the drought are improving the competitive position of the Wisconsin dairy economy relative to its chief competitor: California. Unlike most Wisconsin dairy farms, California dairies must purchase nearly all of their feed. As such, California dairies are not nearly as well positioned to hold things together until feed prices drop back to more ‘normal’ levels. A continuation of high feed prices well into 2013 could result in a contraction of California’s dairy herd.

Congress has yet to pass a farm bill that would replace the one that expired on Sept. 30. The absence of a farm bill has not yet been a major problem for most farmers primarily because grain and milk prices have been relatively strong due to market conditions. If the farm bill or an extension is not passed during the lame duck legislative session, most planting decisions next spring will be made without any knowledge of what crop insurance programs may be offered by the federal government.

There has been a push for federal dairy reform known as the Dairy Security Act. Dairy farmers would have the choice of operating in a free market structure or a voluntary supply management program that only takes effect at times of low prices. This reform package would be the biggest change to dairy policy in a generation and is likely to be included in the next U.S. farm bill.

Overall, the balance sheets of most Wisconsin farmers are as strong as they have been since World War II. Debts are relatively low and the value of farmland continues to rise at roughly the same rate as farm incomes. As a result, farmers have ample amounts of equity and lenders are very willing to extend credit to farmers. Farm lenders have had a problem getting farmers to borrow money because cash flows have been relatively strong over the last few years. However, due to the drought lenders are now seeing increased demand for credit from farmers.

Agricultural economists generally agree that farmland values have increased over the last couple of decades in part because interest rates have steadily declined. With interest rates potentially set to start rising, there are concerns that there could be downward pressure on farmland values. Whether interest rates do go up modestly or dramatically depends on what monetary policies are implemented by the Federal Reserve.

Fiscal Cliff will Likely Whack Health Care Providers... Consequences for Economic Growth
By Steve Brenton, President
Wisconsin Hospital Association

Wisconsin’s hospitals and physician clinics may absorb a disproportionate share of federal budget deficit reduction attention next year and the resulting impact will lead to lower health care provider spending. That means that the health care sector, a traditional engine for economic growth in both good and bad times, can’t be relied upon for the foreseeable future.

Wisconsin hospitals already face a $2.6 billion Medicare (public program for seniors) payment cut that’s “baked into” the Affordable Care Act (ACA) to pay for low income coverage expansion starting in 2014 that’s contained in the legislation. Those payment cuts, over 10 years, may be just the tip of the iceberg going forward. The Medicare program, a popular entitlement at the very heart of exploding federal deficit spending, is a target for major attention by Congress during the first six months of 2013. Already paying hospitals and physicians less that 80 cents on the dollar for actual care costs, more cuts are likely, as is the strong possibility that Medicare’s eligibility age will increase from 65 to 67 over a 20 year period. In addition to hospitals, other service providers – from physicians to rehabilitation providers – are on the chopping block. This uncertainty means lower spending on day-to-day expenses as well as a slowdown in new construction and spending on medical technology, decisions that will ripple through the Wisconsin economy.

On the positive side, Wisconsin’s delivery system is a consistent top performer when national quality report cards are published annually. And recent efforts to slow down operating expense increases and move from a payment system rewarding volume to a system that rewards value are leading to relatively low insurance premium increases, a phenomena likely to continue well into the future.

So my 2013 crystal ball forecasts an uncertain financial time for Wisconsin health care providers who may bear the brunt on entitlement “reform” in a politically charged national arena. It also foretells an era of lower health insurance premiums driven by reduced operating expenses, lower capital spending and more value-based purchasing of health care services.

Status Quo Policies Will Yield Status Quo Economy
By Kurt R. Bauer, President/CEO
Wisconsin Manufacturers & Commerce

While I don’t know what the economy will be like in 2013, I do know most businesses will likely see higher taxes, pay more for energy and health care and face an unrelenting torrent of burdensome new and reinterpreted regulations. On second thought, maybe I do know what the economy will be like in 2013 and it looks a lot like the lackluster performance of the last several years.

If voters provided any clear mandate on Election Day it was for maintaining the status quo on federal government policies. That’s bad news for businesses because continuing the policies of the last four years will yield the same stagnant economic results.

More than 11,000 new regulations were promulgated during President Obama’s first term. The Small Business Administration and the U.S. Chamber of Commerce estimate that businesses pay between $1.7 and $1.8 trillion annually to comply with all regulations. That’s an eye-popping amount of money being diverted away from productive things like research and development, expansion projects, buying new machinery or equipment and – most important of all – away from hiring (at least for anyone other than compliance specialists).

Manufacturing, Wisconsin’s top sector and the backbone of the middle class, continues to face some of the strongest regulatory headwinds. The federal Environmental Protection Agency’s continuing war against fossil fuels in general and coal in particular is a major threat. Industry needs affordable and reliable energy sources that also generate the kilowatts needed to power advanced manufacturing facilities, day or night. You simply can’t run a factory on wind turbines and solar collectors alone.

As of last spring, the U.S. also has the dubious distinction of having the highest corporate tax rates in the industrialized world. At 35 percent, the U.S. is less competitive than Canada (15 percent), the United Kingdom (23 percent) and China (25 percent).

The deceptively named Affordable Care Act is another problem. It increases demand for care by expanding access to roughly 30 million previously uninsured Americans, without increasing supply, i.e., the number of hospitals, clinics, doctors and other health care professionals. High demand and low supply is a surefire formula for raising already high health care costs.

The U.S. economy is also restrained by an already massive and rapidly growing $16 trillion national debt. Tax increases are inevitable, but needed spending cuts and entitlement reform are not, especially after Nov. 6, 2012.

The National Association of Manufacturers (NAM) estimates it is 20 percent more expensive to produce something in the U.S. than in other industrialized nations, excluding labor costs. That fact will make it tough, if not impossible, for President Obama to realize his campaign pledge to add one million U.S. manufacturing jobs during his second term unless he changes course. And considering the president refused to moderate his policies after his party’s drubbing in the 2010 mid-term elections, I wouldn’t expect him to do so after getting reelected by a comfortable margin.

The U.S. economy has proven to be incredibly resilient in the aftermath of 2008, but government-imposed burdens, unsustainable national debt and a weak global economy are formidable obstacles to the strong and sustained recovery everyone is hoping for.

Wisconsin Tech Execs Keep Hopeful Eye on Capital Creation Efforts
By Tom Still, President
Wisconsin Technology Council

Leaders in Wisconsin’s tech sectors are cautiously optimistic as 2013 gets underway, but a natural question to ask is: Relative to what?

If the comparison is to peers in other states, Wisconsin’s tech execs are somewhat more pessimistic than a national sample. They’re also significantly more emphatic that unless access to investment capital improves, Wisconsin will fail to live up to its potential as a tech-based economy.

In a survey released in late 2012, a national association for groups such as the Wisconsin Technology Council took the pulse of nearly 1,100 leaders in tech firms in 18 states. Those states ranged from Massachusetts to Oregon and from Minnesota to Louisiana.

The survey total included more than 90 executives from Wisconsin. Their view of the national economy – as well as the health of their own companies – is instructive as 2013 unfolds.

By small but consistent margins, the Wisconsin tech execs were less optimistic than the national sample about the outlook for the U.S. economy, the national tech economy and their own companies. For example, 83 percent of the national sample was upbeat about the six-month forecast for their companies – but that share dropped to 65 percent in Wisconsin.

Asked what public policy initiatives would spur growth, 72 percent of the Wisconsin sample replied “do more to expand access to capital for startup and high-growth companies.” That compared to 58 percent in the national sample.

Asked how well or poorly state governments have represented the interests of the tech sector over the past two years, 71 percent of the Wisconsin sample replied “just OK,” “poorly” or “very poorly.” That compared to 65 percent nationally.

Two questions spoke to the execs’ perceptions of Wisconsin as a place to do business. Fifty-one percent said they would “definitely” or “probably” recommend that an entrepreneur start a business here, versus 63 percent for the national sample. While 28 percent of the U.S. sample said their state or region was performing at or above its potential as a tech-based economy, only 12 percent of Wisconsin execs said the Badger state is hitting on all cylinders.

Wisconsin’s survey sample included more life science and health technology executives than other states, which may be one reason for the less-than-cheery outlook. That tech sector has the highest capital needs – and suffered the most during the national venture capital drought.

However, the Wisconsin attitudes may also reflect impatience over past failures to create a state-leveraged early stage investment fund. Such funds exist in many other states and serve to attract private capital while protecting the interests of taxpayers. A revised plan may be included in Gov. Scott Walker’s 2013- 2015 state budget proposal, thanks to bipartisan efforts that have included the Wisconsin Economic Development Corp. and its partners.

Some national and global trends cannot be wished away: the inability of Congress and the president to agree on deficit-cutting and debt-reduction strategies; the hidden costs of healthcare reform; the double-dip recession in Europe and sluggish job growth. Potential drivers of national economic growth could include soaring domestic oil and gas production, a byproduct of tech-based innovation, and a continuation of third-quarter 2012 GDP growth into the new year.

For now, however, Wisconsin’s tech sectors are waiting and watching – and hoping that efforts to spur capital growth for emerging companies won’t come too late to help.

Back to the Future?
By Jeff Mayers, President
WisPolitics.com & WisBusiness.com

The more things change sometimes, the more they stay the same.

Many analysts are calling the 2012 contests a status quo election, and you could make the same case here in Wisconsin.

While some of the faces have changed, the partisan alignment looks a lot like it did after the November 2010 elections – despite at least $310 million in estimated campaign spending in 2012 and multiple recalls in 2011 and 2012.

Barack Obama is president, the U.S. Senate is in Democratic hands, the U.S. House is controlled by Republicans, Republicans maintain the edge in the Wisconsin congressional delegation and the GOP dominates the statehouse.

In Congress, Republicans maintain a 5-3 edge in the Wisconsin delegation as northern freshmen Sean Duffy and Reid Ribble won reelection. The only change is in the 2nd Congressional District, where Democrat Mark Pocan is replacing Tammy Baldwin. Paul Ryan, the Janesville congressman and losing GOP vice presidential candidate, returns as House budget chair.

Baldwin (D-Madison) is joining conservative Ron Johnson in the U.S. Senate from Wisconsin as she replaces retiring Democrat Herb Kohl and becomes the first female U.S. senator in Wisconsin history.

In the statehouse, Republicans are back in full control after temporarily losing the state Senate via recalls to Democrats. Come January 2013, they’ll control the Senate 18-15 while they’ll rule the Assembly 60-39.

And Gov. Scott Walker remains in the governor’s office, having survived an historic recall challenge. Despite its presidential swing-state status, Wisconsin is one of 24 states that will be controlled by Republicans, according to a New York Times count.

That means Wisconsin Republicans will mostly have their say about how the 2013-15 state budget is assembled and how a projected $1.5 billion in new revenue is spent over those two years.

Republicans quickly hinted at priorities, including targeting income tax cuts to the middle class, shoring up the state transportation fund to avoid a gas tax increase, providing more school aid coupled with rewards for performance, and coming up with the state share on Medicaid funding as it gives control of a health insurance exchange to the federal government.

Democrats don’t have much leverage, but returning minority leader Peter Barca in the Assembly and new minority leader Chris Larson in the Senate are vowing to be heard.

The budget fight is already underway but will officially start when Walker formally introduces the budget in February. The Legislature will spend a few months doing its review and likely send it back to Walker by the June 30 deadline.

Insiders don’t see the anger, controversy and hardball politics that permeated the first two-year legislative session under Walker, in part because he’s on track to seek re-election in 2014.

While Wisconsin voters kept Republicans in control on the state level, their support of Obama and Baldwin at the top of the ticket suggests they want to see compromise and solutions.