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Wis. Bank CEOs Weigh In on Economic Outlook

WBA releases results of Bank CEO Economic Conditions Survey 

In the Wisconsin Bankers Association’s biannual Economic Conditions Survey of Wisconsin bank CEOs, nearly three quarters of respondents rated Wisconsin’s current economic health as “excellent” or “good.” These most recent survey results show some easing of inflation and recession concerns; 86% of respondents predict inflation to fall or stay about the same over the next six months, compared to 76% of respondents in the prior survey conducted at the end of 2022. Pessimism is fading as only 48% of respondents predict the economy to worsen over the next six months, compared to 72% of respondents at the close of 2022. 

“Wisconsin bank CEOs have unique knowledge of their local market dynamics, given their economic expertise along with their relationships with businesses, community organizations, families, and individuals in their areas,” said WBA President and CEO Rose Oswald Poels. “With a mild recession predicted for the remainder of the year, bankers continue to serve as trusted partners in helping community members weather challenges and achieve their financial goals.“ 
 
Among the economic bright spots cited by CEOs in the survey were high employment and wages, demand for goods and services, strong industries — summer tourism, construction, agriculture, and manufacturing — and in-migration from the Twin Cities and Chicago. Top economic concerns reported by bank CEOs were inflation and labor — particularly in service-related industries, deposit growth, and compressing interest rate margins. 

 
The mid-year 2023 survey was conducted May 16–31 with 66 respondents. Sums may not equal 100 percent due to rounding. Below is a breakdown of the survey questions and responses.

How would you rate the current health of the Wisconsin economy. . .  Mid-Year 2023 End-of-Year 2022  Mid-Year 2022 
Excellent 5% 6% 7%
Good 68% 69% 64%
Fair 27% 24% 29%
Poor 0% 1% 0%
In the next six months, do you expect the Wisconsin economy to. . . 
Grow 0% 0% 2%
Weaken 48% 72% 63%
Stay the same 52% 28% 36%
Over the next six months, do you expect inflation to. . . 
Rise 14% 24% 50%
Fall 44% 51% 22%
Stay about the same 42% 25% 28%
How likely would you say a recession is in the next six months? 
Very unlikely 0% 0% 4%
Unlikely 5% 3% 16%
Neutral 24% 10% 20%
Likely 56% 62% 45%
Very likely 15% 25% 16%
Rate the current demand in the following categories: 
Business Loans 
Excellent 6% 3% 2%
Good 44% 44% 48%
Fair 48% 46% 48%
Poor 2% 7% 2%
Commercial Real Estate Loans 
Excellent 11% 6% 7%
Good 33% 34% 52%
Fair 50% 53% 36%
Poor 6% 7% 5%
Residential Real Estate Loans 
Excellent 5% 4% 2%
Good 14% 7% 20%
Fair 50% 33% 50%
Poor 31% 55% 29%
Agricultural Loans 
Excellent 0% 3% 2%
Good 41% 23% 37%
Fair 50% 60% 51%
Poor 9% 13% 10%
Deposit 
Excellent 3% 3% 5%
Good 17% 44% 55%
Fair 58% 44% 38%
Poor 23% 9% 2%
In the next six months, do you anticipate the demand for the following categories will. . . 
Business Loans 
Grow 6% 8% 11%
Weaken 50% 56% 48%
Stay the same 44% 35% 41%
Commercial Real Estate Loans 
Grow 9% 1% 13%
Weaken 56% 63% 48%
Stay the same 35% 35% 39%
Residential Real Estate Loans 
Grow 13% 6% 4%
Weaken 25% 54% 63%
Stay the same 62% 41% 34%
Agricultural Loans 
Grow 12% 15% 6%
Weaken 32% 38% 31%
Stay the same 56% 48% 63%
Deposit 
Grow 17% 13% 11%
Weaken 31% 38% 36%
Stay the same 52% 49% 53%
In the next six months, are the businesses in your bank’s market area likely to. . . 
Hire employees 25% 17% 31%
Maintain current staffing levels 69% 71% 61%
Lay off employees 6% 11% 7%
In the next six months, is your bank likely to. . . 
Hire employees 23% 23% 34%
Maintain current staffing levels 74% 73% 63%
Lay off employees 3% 4% 4%
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Unmaking the Myths: Fact Checking Community Banking

By Achim Griesel and Dr. Sean Payant

Banking, and specifically community banking, is essential to the overall health of our country. By design, it serves as the backbone for our financial system and communities, while playing a crucial role in helping individuals, businesses, and governments thrive.

In this highly competitive environment, community banks must continuously adapt to the changing landscape and competitive pressures. The key to success is to challenge and shatter the traditional banking myths that have been prevalent for years. Let’s explore five such myths and why they need to be shattered.

1. The Efficiency Ratio

Myth: Managing expenses is the best way to improve overall efficiency.

Fact: Increasing overall revenue is much more impactful.

The efficiency ratio is an important metric for financial institutions (FIs) to track as it measures how efficiently FIs are using resources to generate revenue. It is often thought the best way to improve the efficiency ratio is to manage expenses by embracing technology, controlling costs, and determining appropriate staffing levels. But, managing expenses is a very finite opportunity. The unlimited opportunity for FIs to improve their efficiency ratio is not on the expense side. It is on the revenue side as illustrated in Figure 1 by comparing high performing banks to others. Institutions should focus on growing revenue, as this will have a much bigger impact on profitability. There are two ways to accomplish this effectively: (1) growing core customers, and (2) growing share of wallet. The bigger, more strategic option is in growing core customers because this also enables your FI to exponentially grow share of wallet.

2. Growing Core Deposits

Myth: A rising rate environment is the time when institutions need to focus on core deposits and relationships.

Fact: Growing core deposits and relationships should be an always-on, strategic initiative.

With the recent rate increases and the decline in deposits since mid-2022, bankers are once again focusing on core deposits and core relationship growth. Large banks are promoting cash rewards that triple prior offers, and they are marketing at a frequency that is 3-4 times that of prior years. Why? In order to acquire new core relationships. FIs see the current environment as a prime time to grow low-cost core funding. However, this is far from the truth. The truth is, it is always a good time to focus on growing core relationships and core deposits regardless of the economic environment. By doing so, FIs position themselves well for any rate and non-interest income environment.

3. Deposit Market Share

Myth: Deposit growth is a function of deposit market share.

Fact: Deposit growth is a function of household and business market share.

FIs often focus on deposit market share as a measure of growth, but this is not always the best indicator. Instead, it’s important to focus on household and business market share. Essentially, what percentage of the FI’s footprint are they serving? Deposit market share is very much driven by larger deposits that often come at a higher cost. It is also distorted by branch locations, or lack thereof, for digital banks. Household and business market share is a much better indicator of the ability to attract and retain consumers and businesses, and it provides a clearer picture of overall growth and success.

4. Staffing Challenges

Myth: It isn’t possible to hire or retain employees in the current environment.

Fact: Retention and recruitment is a function of an FI’s investment in and focus on developing better leaders and coaches.

Staffing and human capital challenges have been one of the most prominent issues for FIs since the pandemic. Finding talented employees continues to be difficult, and retaining talented employees is a must. While the combination of these factors results in staffing challenges, the solution lies in an FI’s approach to its leadership and coaching strategy. By investing in the development of leaders and creating a strong coaching culture, FIs can ensure their staff is well equipped to deal with the challenges of the industry, while also feeling valued by the institution. The result is a decrease in turnover, improved knowledge, and stronger alignment with the brand; this ultimately creates improvements in customer satisfaction and improved overall performance.

5. Sales Culture

Myth: Having a “sales culture” is the only way to drive results.

Fact: Aspiring to have an escalated service culture will result in increased product and service usage.

FIs often aspire to have a “sales culture,” but this is generally not the best approach. The key to success is to have an escalated service culture, where the focus is on providing products and services to make people’s lives better. By focusing on providing excellent customer service, FIs can build stronger relationships with consumers, increase overall satisfaction, and create a positive image for the institution. A result will be increased sales and improved overall performance.

By challenging and shattering these traditional myths or approaches to banking, FIs can create a more efficient and effective approach to their operations, which will lead to increased profitability, meaningful growth, and measurable success. By focusing on the right metrics, investing in the development of leaders, and creating a strong service culture, FIs can ensure that they are well positioned to succeed in this highly competitive industry.

Achim Griesel is president and Dr. Sean Payant is chief strategy officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community financial institutions.

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Trust Professionals Reconvene in Madison This Spring

On May 25, 2023, WBA will once again host its annual Trust Conference at the Wisconsin Bankers Association (WBA) headquarters in Madison. The one-day event, designed specifically to aid trust officers, wealth managers, and trust administrators in enhancing their operations, will provide attendees with the resources to utilize in their adoption of various changes in regulations, the economy, and overall trust department functions.

In addition to various networking opportunities, the conference will feature several topics critical to those involved with trust and estate planning.

Victor Schultz, president and chief fiduciary officer at Prairie Trust, will provide attendees with an update on the Trust Code and Trailer Bill. This presentation will cover all the improvements, fixes, and benefits of this bill, designed to update Wisconsin’s Trust Code.

Trust professionals will also have the opportunity to hear from Mike Burke of SHAZAM regarding the importance of recognizing elder financial abuse throughout the institution. As fraudsters become more sophisticated, it is important that bankers know the signs, understand their rights, and feel confident in approaching the situation.

Bankers are encouraged to register for the upcoming event at wisbank.com/Trust in order to take advantage of this opportunity to stay ahead of upcoming regulatory changes, earn continuing education credits, and gain insight on how to better serve their communities.

Questions regarding this year’s event can be directed to Miranda Gustafson, WBA assistant director – education.

Register Now
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Triangle Background

FDIC Numbers Show Positive 2022 Year-End Position of Wisconsin Banks

Wisconsin banks finished 2022 in a strong financial position. Fourth-quarter data from the Federal Deposit Insurance Corporation (FDIC) show consumers paying down debt and putting money into savings at the bank. The housing market remained active as home prices cooled slightly, the agricultural industry had a favorable year, and businesses continued to grow throughout 2022. While the economy is experiencing ongoing inflationary pressure and geopolitical concern, Wisconsin banks remain well capitalized and serve as trusted partners to help their customers achieve their financial goals. 

Notable indicators include: 

  • Residential loans continued to grow, both quarter over quarter (3.09%) and year over year (13.71%). With low inventory, homes continue to sell quickly. Despite recent interest rate increases, rates remain relatively low in historical context. 
  • Commercial lending increased year over year (11.09%) but slowed toward the end of the year as business owners held off on borrowing due to concerns of recession in 2023. 
  • Farm loans decreased 20% quarter over quarter yet remain up 8.12% year over year. While farmland values remain strong, sharp interest rate increases have resulted in the softening of some farm loan demand. An increase in farm income toward the end of 2022 also led to an increase in loan repayments. 
  • Credit quality continued to be strong as borrowers kept up to date on their payments. Loans and leases 90 or more days past due decreased 19.74% year over year and decreased 1.40% quarter over quarter. 
  • Deposits continued to grow, albeit at a slower pace as inflation limited the amount consumers were able to put into savings. 

Statement on the release of fourth-quarter 2022 Federal Deposit Insurance Corporation (FDIC) numbers from Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association:  

“The fourth-quarter FDIC numbers show Wisconsin’s banking industry in a solid position. While inflation persists in driving up expenses for households and businesses, the overall picture shows that more borrowers are keeping current on their loans and consumers are putting money into savings at their bank.”

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Soft Landing Possible for 2023

St. Louis Fed President James Bullard and PNC Chief Economist Gus Faucher Headline Midwest Economic Forecast Forum 

By Cassandra Krause

St. Louis Federal Reserve Bank President James Bullard opened the 2023 Midwest Economic Forecast Forum with bullish optimism, followed by PNC Chief Economist Gus Faucher, who offered viewers a slightly less optimistic outlook but would not rule out the possibility of a soft landing. The January 12 virtual event was hosted by the Wisconsin Bankers Association in partnership with Arkansas Bankers Association, Illinois Bankers Association, Kentucky Bankers Association, Michigan Bankers Association, Minnesota Bankers Association, Missouri Bankers Association, South Dakota Bankers Association, and the Wisconsin Bankers Foundation. BOK Financial Capital Markets, Wipfli, and the Wisconsin REALTORS® Association were event sponsors.  

An Economic Discussion with Federal Reserve Bank President James Bullard 

In his opening remarks, Bullard cited above-trend GDP growth in the second half of 2022, which brought GDP growth more in line with the labor market. (The first half of 2022 saw negative GDP growth while the labor market was strong.) In addition to the GDP growth, Bullard noted other bullish factors, such as households remaining flush and bank deposits staying relatively high. While high inflation has caused consumers to spend down some of their savings, Bullard pointed to COVID dollars that provided a cushion to support consumption spending. Another factor he highlighted was that state and local governments are also relatively flush with cash from COVID dollars and tax revenue, especially from 2021. 

Global Prospects Have Brightened 

Bullard commented that global prospects are now better than they were even just a few weeks ago. For Europe, there is a lower possibility of recession, and the worst of the winter worries about energy prices have faded. As for China, there has been an abrupt change in COVID policies, and the economy looks to be reopening going forward. The positive developments in these two major economies, in concert with those in the U.S., indicate that global growth prospects have brightened in a short time. 

That said, Bullard discussed in the Q&A that Russia is a major producer of oil and natural gas for Europe, and commodity prices have been impacted. Energy prices and commodity prices feed through to other aspects of pricing, so it is not easy to disentangle the energy crisis from other crises. While he hopes that a resolution in the conflict in Ukraine can be reached, he acknowledged that it remains an extremely dangerous situation that is likely to persist for some time. He noted that in some cases of wars that have gone on for some time in history, markets have adjusted to that equilibrium, and that has happened to some degree with Russia’s war in Ukraine.  

Shipping from China went up in cost during the pandemic and has come down dramatically, mitigating supply chain issues. American businesses are astute at finding workarounds or even changing their product, Bullard said, so that they aren’t as reliant on particular parts from a specific area. He also said that businesses are moving away from “just in time” to “just in case” inventory strategizing, so they’re not overly reliant. Additionally, he pointed out that the Russian invasion of Ukraine has sensitized people to geopolitical issues, so they understand that global supply chains are not as reliable as they may have been in previous decades. 

Fed President Bullard Favors Front-loaded U.S. Monetary Policy 

With 1.7 job openings for every unemployed worker in the U.S., Bullard said it is hard to see how unemployment would go up. Meanwhile, unemployment insurance claims remain low, and workers feel confident they can quit their jobs and go to another job. 

Though the December 2022 inflation rate of 5.7% (all items, less food and energy) is well above the target of 2%, Bullard told Forum viewers it is moderating in response to the front-loaded and aggressive monetary policy in 2022. He maintained that the Fed’s policy has been the right one and that the repeated return of inflation — as experienced in the 1970s — can be avoided by maintaining rates at high enough levels and not dragging things out into 2023.  

During the Q&A session, Bullard said that the fact that M2 growth has collapsed bodes well for disinflation prospects in 2023. While it’s a good sign, he said the correlation between M2 growth and inflation is not strong enough to rely on solely as a policy basis. 

If inflation does not moderate as quickly as markets are hoping for, he said the Fed would have to react. His preference would be to get above 5% interest rates as soon as possible to put downward pressure on inflation.  

Bullard’s 2023 Outlook 

When asked which sectors are under the greatest recessionary pressure in 2023, Bullard responded that the sector most impacted by rate increases has been housing. He noted that the housing market started reacting “before the Fed had barely done anything.” Markets anticipate policy, said Bullard, and this has real effects on the ground before the policy move is made. 

Looking at the overall picture, Bullard said that recession risks have diminished some in the last 90 days, Q4 2022 was stronger than expected, unemployment is down, and jobs are up, all of which signal that prospects for a “soft landing” — a period of slowed growth to bring inflation down but without going into recession — have improved. He concluded by saying, “so far so good, and let’s hope that’s the outcome for 2023.”  

Recession Risks Elevated in 2023 as Fed Raises Interest Rates to Fight Inflation – Augustine (Gus) Faucher 

In a slightly less optimistic perspective, PNC’s Faucher told Forum viewers that a mild recession is likely in 2023. He said the biggest problem is employers not being able to hire. While the U.S. economy is expanding and small businesses view their prospects optimistically over the next six months, Faucher pointed to concerns of rising interest rates and the expectation that the Fed funds rate will continue to increase. Another factor Faucher cited was volatility in stock prices, which is currently higher than it was in 2021 but lower than it was in 2020.  

Yield Curve Has Inverted 

In his overview, Faucher noted that employment levels have fully recovered from the pandemic and economic activity is now above the pre-pandemic peak. At the same time, consumer spending on services lags and, though consumer spending on durable goods is above pre-pandemic levels, that will decline as interest rates make it more expensive to borrow for items like cars, said Faucher. Similarly, he predicted that with higher interest rates, consumers will continue cutting back in the residential real estate market in 2023. Faucher also noted that exports are up slightly from pre-pandemic levels and imports are up; noting that the economy wasn’t ready to support the influx in demand for imported goods during the pandemic. 

A metric Faucher is paying close attention to is the yield curve. He said that when the yield curve inverts, a recession typically follows 6–9 months later, so there’s a good indicator that a recession is coming in the 2023 U.S. economy.  

He illustrated the difference between the yield on a 10-year Treasury (long-term security) and a 3-month Treasury (short-term security). Normally long-term rates are above short-term rates because lending for a longer period of time involves taking on more risk. Because long-term rates have gone up somewhat and short-term rates have gone up even more, an inversion in the yield curve has resulted. 

He expects the yield curve to invert further following upcoming Fed meetings in early February and mid-March. He said a deep inversion reflects not just what the Fed is doing, but also reflects market sentiment. 

Faucher Predicts Milder Effects Than in Previous Recessions 

Faucher predicts a 2023 recession will be more like the recessions of the early 1990s or the early years of this century and not as severe as the Great Recession or the Viral Recession. Reasons Faucher cited for a milder recession are: 

  • Consumers are positioned to weather a recession relatively well. Many homeowners refinanced at lower rates and many consumers still have a good personal savings rate, though high inflation has hit low-income households especially hard.  
  • Employers will be reluctant to lay off workers because it will be harder to rehire when the economy picks up, in part due to the accelerated retirement of baby boomers during the pandemic. 
  • The housing market is in “decent shape.” The housing market has been undersupplied for years, and factors like sub-prime loans that contributed to the Great Recession are no longer present. 
  • Delinquency rates are extremely low. Though credit quality would likely deteriorate with a recession in 2023, banks are well capitalized and can withstand higher losses in that scenario. 

Recession Not Guaranteed 

Faucher does not think recession is inevitable, listing open questions, including Ukraine and China.  

On a regional level, he highlighted that the Midwest has more affordable housing than other regions and that people with greater flexibility for remote work may take advantage. If people have to go to the office, however, this migration to the Midwest might suffer. Faucher said it’s a question of whether people continue moving inland from coastal cities and to more suburban or rural areas from larger cities. 

In 2020, every area of the country saw economic contraction, whereas in November 2022, data from the Federal Reserve Bank of Philadelphia showed most of the country in expansion. Faucher also pointed to Midwest employment being almost back to pre-recession levels. He said that weak demographics are the Midwest’s biggest problem in the long run: slow population growth makes it difficult to find new workers, which encourages businesses to move elsewhere. 

Overall, Faucher gives it about a 1 in 3 chance that the Fed manages to pull off a soft landing in 2023. 

If you were unable to attend the live broadcast, you may still contact wbaeducation@wisbank.com to register to receive access to the recording and materials through January 26, 2023. 

Wisconsin Experts Offer Sector Forecasts  

As an extension of the Midwest Economic Forecast Forum, WBA has compiled eight sector-specific reports from industry experts on what 2023 will hold for Wisconsin. The reports include insights from Rose Oswald Poels, Wisconsin Bankers Association; Robb Kahl, Construction Business Group; Kevin Krentz, Wisconsin Farm Bureau Federation; Brandon Scholz, Wisconsin Grocers Association; Eric Borgerding, Wisconsin Hospital Association; Kurt Bauer, Wisconsin Manufacturers & Commerce; Michael Theo, Wisconsin Realtors Association; and Tom Still, Wisconsin Technology Council. 

To read the full Wisconsin Economic Report, please visit wisbank.com/2023forecast. 

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2023 WBA Bank Executives Conference

February 8–10, 2023 | Kalahari Resort & Convention Center, Wisconsin Dells

Bank Executives Conference Banner

By Hannah Flanders

The Wisconsin Bankers Association (WBA) is excited to announce that the annual Bank Executives Conference will reconvene at the Kalahari Convention Center in Wisconsin Dells this February 8–10. As the largest gathering of bank leaders in the state, this year’s event will focus on bringing leaders “All In” for the benefit of their bank, community members, and industry.

Executive-Level Education

Each year, WBA’s Bank Executives Conference is regarded as the state’s premier gathering of banking professionals and national experts — the 2023 event
will be no different!

In combining programming tailored to the specific needs of banking leaders in Wisconsin with various trending topics sure to impact our industry, bankers will have the opportunity to arm themselves with the resources and knowledge to remain relevant and resilient for years to come.

Heyburn_Virginia

Virginia Heyburn

This year’s opening general session on February 9 will feature Virginia Heyburn, director of research, insights, and advocacy at Engage fi, LLC. As innovation and technology remain at the forefront of our industry’s efforts to engage individuals in the financial services, Heyburn will highlight the possibilities of FinTech partnerships as banks look to develop new revenue channels and reach customers in today’s world of rapidly changing competition.

After the general session, WBA will host its first FinTech Showcase. Bankers can expect to see eight FinTech products, ranging from solutions for digital banking and artificial intelligence (AI) to security, demonstrated live by various companies including Accrue, La Macchia Group, DocFox Inc., Kapitalwise, Inc., KlariVis, LemonadeLXP, Sequertek, and Zogo Finance. Following short presentations, bankers will have the opportunity to connect with these exhibitors, and more than 60 others, to learn more about their solutions and how FinTech will bring the bank into the future.

Brett King

Brett King

On Friday, February 10, four-time bestselling author and renowned futurist, Brett King will present the keynote session “The Big Shift: How Customer Behavior & Technology Will Change the Future of Retail Financial Service.” King, voted as American Banker’s Innovator of the Year in 2012 and a regular contributor to The Huffington Post, will highlight why customer behavior is so rapidly changing and why banks must reinvent themselves or face irrelevancy.

With over ten hours of general and breakout sessions spread across the three days — there will certainly be something of interest for every bank leader. For more details on programming and to view the full agenda, please visit wisbank.com/bec.

Networking

Attendees will also have various opportunities to connect with their banking peers, WBA Associate Members, and WBA staff throughout the conference.

In addition to kicking off the conference on Wednesday evening with a networking reception in the exhibitor Marketplace, bankers are invited to arrive early on February 8 for various “banker-only” peer group discussions. The optional peer groups, beginning at 2:30 p.m., are specifically targeted at CEOs, CFOs, credit and lending professionals, and those in operations.

Recognition

WBA looks forward to recognizing various bankers who have been “All In” for their communities and for their industry — despite the unpredictability of the last several years.
In selecting the unifying theme “All In” for this year’s conference, the Association recognizes that the unity and commitment leaders and bankers across the state have, and will continue to, demonstrate are critical to the prosperity of the industry and communities all WBA-member banks serve. In this, it is important that bankers not only reflect upon their successes of the past year but look ahead to what possibilities are in store.

The conference will feature a special luncheon on February 9 during which several bankers who have dedicated a lifetime of service to the industry will be inducted into WBA’s 50- and 60-Year Clubs. In addition, the Wisconsin Banker Foundation (WBF), the Association’s non-profit arm, will present its prestigious Financial Education Innovation Award to a WBA-member bank that, during the 2021–2022 fiscal year, demonstrated unique efforts to enhance the financial capability of consumers in their community.

That evening, WBA will recognize a bank CEO or president (or an individual who has recently retired from these positions) who has made an outstanding effort throughout their career in service to their bank, to their community, and to the banking profession as the 2022 Banker of the Year.

Registration

Banking leaders regularly prove their commitment to our industry by way of their active involvement, efforts to embrace evolution, and often tenure of service. WBA’s Bank Executive Conference builds upon these important steps by providing bankers with resources, connections, and ideas for action.

Registration for WBA’s annual conference is open now! Please visit wisbank.com/bec to learn more and register today. We look forward to seeing you Wednesday, February 8–Friday, February 10 at the Kalahari Convention Center in Wisconsin Dells!

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Housing Market Slows as Demand Cools and Inventory Remains Tight

WBA Wisconsin Economic Report

Wisconsin REALTORS® Association

By Michael Theo, WRA President and CEO
With insights from Dave Clark, economist with Marquette University

After two straight years of record home sales, the Wisconsin existing home market slowed significantly in 2022. This was a result of both declining demand and continued weak housing supply. Demand slowed in part because the economy weakened slightly in the first half of the year. Specifically, the real (inflation adjusted) GDP fell 1.6% in Q1 of 2022, and it slowed 0.6% in Q2 before rebounding by 2.9% in the third quarter. Still, the labor market remained at full employment which likely presented the National Bureau of Economic Research from classifying the slowdown as an official recession. What really slowed demand was the rapid decline in housing affordability. In October of 2021, a Wisconsin buyer with median family income qualified to buy 201% of the median priced home in the state, assuming a 20% down payment and the remainder financed by a 30-year fixed-rate mortgage at the rates that existed at that time. Just 12 months later, that same buyer would only qualify to purchase 136% of the median priced home. Although median family income was estimated to have grown by 6.2% over that 12-month period, that was offset by a 6.1% increase in the median housing price, and a more than doubling of the 30-year fixed rate mortgage, from 3.07% in October 2021 to 6.90% in October 2022. Weakness on the supply side only exacerbated the problem with total listings in October 2022 down 24% compared to that same month in 2021. Overall, through the first 10 months of 2022, home sales were off their 2021 pace by 11.2%. Even though sales have weakened significantly, this remains a strong sellers’ market with just 2.6 months of available supply in October 2022, which is well below the six-month benchmark that signals a balanced housing market.

One reason the mortgage rate rose so quickly is because inflationary expectations, which lenders must consider when extending long-term credit to homebuyers, have increased in the past year. That is, inflation is no longer viewed as transitory. As a result, the Fed has taken decisive action to slow the economy and reduce inflation. The Fed’s primary tool to slow inflation is to increase the short-term federal funds rate, which is the rate that member banks lend to each other to cover overnight reserve shortfalls. Specifically, the upper limit of the federal funds target range rose from near zero (i.e., 0.25%) at the beginning of 2022 to 4% by early November. The good news is that there has been some slight improvement in headline inflation, which peaked in June 2022 at 9.1% and fell to 7.7% by October. Hopefully that trend continues. Still, inflation remains well above the Fed’s target inflation rate of 2% and the Fed has indicated that it intends to keep raising short term rates until inflation is under control, even if its actions lead to recession. Given that the U.S. and Wisconsin labor markets are currently at full employment (i.e., both were under continue its upward movement of the federal funds rate. Until inflationary expectations are lowered, mortgage rates will remain elevated and affordability will remain low. This, combined with tight inventories, will constrain the housing market in 2023.

Nationally, policymakers need to maintain their focus on the inflation problem. Clearly the Fed is committed to controlling inflation, but Congress and the Biden Administration need to avoid exacerbating the inflation problem through irresponsible spending practices. While there is little that local policymakers can do to stimulate the demand side of the housing market, they can help set the stage for new construction once the housing sector begins to improve. This includes lowering the regulatory burden and helping to foster growth in training in the building trades.

Founded in 1909, the Wisconsin REALTORS® Association (WRA) is one of the largest trade associations in Wisconsin. It represents and provides services to more than 15,000 members statewide. WRA’s goal is to promote the advancement of real estate in Wisconsin and provide cutting-edge tools to help REALTORS® enjoy a successful career and be competitive in their market.

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Recession or No, Wisconsin Tech Sectors Can Move Ahead in 2023

WBA Wisconsin Economic Report

Wisconsin Technology Council

By Tom Still, WTC President

Call it the “Great Reset.” After years of predictably robust growth, technology stocks rebooted in 2022 and disrupted public markets all the way down. The question is whether technology stocks — specifically, Big Tech — will climb back in 2023.

The answer is “probably,” but not right away. Both the Nasdaq-100 and the S&P 500 are tech-heavy at the top, and 2022’s major value rundowns took place as the tech industry came to grips with too much growth, too fast. Much of that pain may be past. Moreover, tech stocks historically do well in the recovery phase of a recession rather than leading up to one.

The Wisconsin economy is increasingly intertwined with what’s happening in tech markets. Companies such as Microsoft, Amazon, Google, and Tesla all have a presence in the state in one form or another, especially with the advent of remote work. That neighbor who you thought was a stay-at-home mom may well be a software coder.

Whether it brings a full-fledged recession or an economic course correction, the year ahead is a time to seize opportunities to make Wisconsin even more open to tech-based businesses and workers. Some examples:

  • Wisconsin should take the next step in seeding the clouds for a private-public “fund of funds.” Out-of-state venture capitalists are increasingly finding solid deals in Wisconsin; earlier state pump-priming is working; the research base is here; and a huge state budget reserve should create room for a state investment that levers private dollars. Out-of-state investors will continue to be attracted by strong deals, but also by the state’s willingness to show confidence in its own startup expertise.
  • Wisconsin is positioned to take advantage of changes in energy and other technologies that can make the world more resilient in the face of climate change. Innovation in solar and wind energy will continue — so long as the grid keeps up with the demand. Storage technologies are a sweet spot; nuclear fission and fusion may help in the long run; some industries see a future in hydrogen energy; and the state is a center for freshwater technology innovation. Can migrating “climate refugees” to fill workforce holes be too far off?
  • With better incentives, the state could see an influx of industrial research, data centers (which use a lot of water, by the way), and even video game development. The Columbus, Ohio, region won the Intel semiconductor production fight, but there may be more chip-making chances to come.
  • There are myriad ways to mess things up, of course. Beating up the healthcare industry over costs alone is a bad strategy in an era when people move for jobs and lifestyle, which includes high-quality health care. Not recognizing the economic value of higher education is a similar mistake. If there’s one thing about the Minnesota economy that makes it more attractive to site selectors, it’s the significantly higher percentage of people with post-high school degrees. Wisconsin also has yet to adopt a plan for how to place more electric vehicle charging stations. It’s currently 43rd out of 50, according to Governing magazine. Finally, don’t scrimp on the state’s research and development future by making it too hard to build academic science and engineering buildings. When Wisconsin delays, its competitors forge ahead.

The Wisconsin Technology Council is the independent, non-partisan science and technology advisor to the Governor and the Legislature.

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It’s the Workforce, Duh

WBA Wisconsin Economic Report

Wisconsin Grocers Association

By Brandon Scholz, WGA President and CEO

For grocers, it has been an incredible gauntlet from the beginnings of the pandemic in 2022 to the peek over the 2023 precipice.

The challenges created for grocers and their suppliers as the pandemic lodged itself into the daily business operations have only continued to create hurdles for the industry.

As most grocery store shoppers know, not all shelves are full of their favorite products — shoppers have had to deal with substitutes or alternatives.

Throughout all these topsy-turvy, head-spinning challenges, there is one common denominator that bears most of the blame for what drives grocers crazy.

Workforce.

Simply put, there are not enough people available to fill the jobs open today, nor in the years to come. Reports have suggested the workforce population in Wisconsin is flat and likely to decline. Forward Analytics notes Wisconsin’s youth population has declined 4.3% since 2010 and says a decline in the state’s under-18 population will causes economic problems. That same report forecasts that by 2030, the working population will be down by 130,000 people.

Grocers, convenience stores, and retail businesses report there simply is not a pool of people in the workforce that can fill the gaps. And, for those who want to suggest otherwise that all is good because unemployment is low and UI applications are down, that’s not necessarily the case.

There are all sorts of reasons why the workforce is running on empty. During the pandemic, people chose not to work; were let go by employers who couldn’t keep their doors open; received state and federal assistance to make up for their non-employment status; as well as other factors.

Confounding the employment factor is the regressive impact of inflation that has chewed up most all the incredible and eye-popping increasing in wages and benefits.

Rolling into 2022, with the government giving assurances that the economy was in good shape (inflation not withstanding), the expectations were that people would come back to their jobs, or any job.

Not so. Didn’t happen. Not only did people not show up, but the pool of prospective employees was more like a very small pond.

The forecast for 2023 doesn’t look much better. You may find grocers taking down a checkout lane and adding a self-checkout stand to help their customers move through the end of their shopping experience.

What’s the solution? Wisconsin needs to bring people back to Wisconsin to work here. The question is how.

Let’s target quality of life issues in Wisconsin and focus legislative, employer, and community efforts on several key areas. Good businesses, strong communities, safe streets and less crime, daycare, housing, public transportation, and good schools are key components of attracting new workers to Wisconsin.

These changes will require funding solutions, regulatory relief, and legislative initiatives in local, county, and state governments.

Grocers and their customers are resilient. They’ve proved it since the pandemic started. It doesn’t mean that things are hunky dory, but we’re approaching critical mass. Changes must be made to solve our workforce crisis.

Winsight Grocery Business notes that inflation, technological advances, and the pandemic have influenced grocery shopper habits. It’s a common sight to see shoppers using smartphones to look up sales, product information, loyalty apps, and more.

While these changes have become common place for the customer, they are not long-term solutions for the retail world.

It starts with the workforce and quality of life.

The Wisconsin Grocers Association represents nearly 1,000 independent grocers, retail grocery chain stores, warehouses and distributors, convenience stores, food brokers, and suppliers. Wisconsin grocers employ over 50,000 people with more than $1 billion in payroll and generates more than $12 billion in annual sales in Wisconsin resulting in approximately more than $800 million in state sales tax revenue. Visit wisconsingrocers.com.

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COVID Continues Stress on Health Care

WBA Wisconsin Economic Report

Eric BorgerdingWisconsin Hospital Association

By Eric Borgerding, WHA President and CEO

Nearly three years after COVID-19 upended the health care system, hospitals continue adjusting to what are clearly longer-lasting, if not permanent, impacts of the pandemic. At the same time, Wisconsin hospitals and health systems, 95% of which are nonprofit, continue providing a variety of services and filling social and public health gaps across the state, but ongoing strains on resources, finances, and workforce are posing unprecedented challenges to fulfilling these missions.

Well-documented burnout caused job vacancy rates to increase in 13 of 17 Wisconsin hospital professions in 2021, by double digits in seven of those. Higher vacancies have forced hospitals to increasingly rely on very costly temporary staffing. According to the American Hospital Association, hospitals’ use of contract temporary labor increased 132% for full-time and 131% for part-time staff last year.

As reported in our 2022 Workforce Report, citizens over the age of 55 make up 28% of the country’s population but account for 57% of health care spending — trends mirrored here. As health care needs increase with the aging population, demand for Wisconsin’s health care workforce will also increase while its supply is expected to diminish. An aging population also means more health care is covered by Medicare, which reimburses Wisconsin hospitals at 23% below what it costs to provide care. Medicare now comprises nearly 50% of Wisconsin hospitals’ “payer mix” and is growing.

The CDC estimates that 41% of U.S. adults either delayed or avoided non-COVID medical care during the early stages of the pandemic. Patient volumes have rebounded since their COVID-induced plunge in 2020, but many of those patients are sicker, more resource- and cost-intensive with longer, often unreimbursed, lengths of stay.

Hospitals are not immune to the impacts of historic inflation, which has caused sharp spikes in labor, drugs, and medical supplies costs. Wisconsin hospitals have experienced a $580 million annual increase in labor costs and $1.6 billion annual increase in supply costs since 2019. We reported in October that supplies and services remain the largest expenses for Wisconsin hospitals, up 14.7% since 2019. The ability to simply recoup these costs by raising prices has essentially disappeared, yet health insurance premiums continue rising. According to a recant Kaiser analysis, in the past year, the CPI for hospital services rose 3.4%, compared to 7.7% for all good and services and a whopping 20.6% for health insurance.

Soaring inflation coupled with diminished resources caused drastic declines in Wisconsin hospital and health system operating margins in the first half of 2022, falling to 0.4%. Total margins dropped well into the red at -11.9%.

Despite these new realities, Wisconsin’s hospitals remain committed to delivering quality care for everyone, while still subsidizing negative margin services (hospice, home health, behavioral health, long term care, others) that would not otherwise exist in many communities. Responsible stewardship has helped Wisconsin hospitals manage through the pandemic, but its lingering damage is posing serious and ongoing challenges.

Established in 1920, Wisconsin Hospital Association (WHA) advocates on behalf of its 140-plus member hospitals and health systems to enable the delivery of high-quality, high-value care across Wisconsin. Visit WHA at wha.org.

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Madison, WI 53718

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