Michigan Future Business Index Q4 2018 Chris Holman President Michigan Business Network

Michigan Future Business Index Statewide survey of 468 small to medium-sized businesses Mixed-mode survey, conducted online and by phone Commissioned by Accident Fund & Michigan Business Network Conducted by ROI Insight Field Dates: November 4 through 30, 2018 Margin of Error: ± 4.5% or less 95% Degree of Confidence

Key Takeaways Positive perceptions of the state business economy have reached an all- time high, but we see slight uncertainty building in future sales and profits projections. (Are we at a tipping point?) Respondents say the new tariffs on goods from various countries may be canceling out benefits from the recent tax cuts. Increased investments in hiring and wages, added to increasing challenges with finding and retaining customers, may indicate a potential strain on future growth. Future hiring and wage increase projections are at an all-time high. Acquiring new talent remains the greatest challenge. While the indicators remain strong, growing challenges of high health care costs, finding customers and wage inflation put future growth at risk.

The Past Six Months Growth in wages, hiring and sales, while profits and capital investments remain flat Wage growth up ten points from Q4 2017 From 36% to 46% Hiring up eight points from Q4 2017 From 20% to 28% Sales up four points from Q4 2017 From 45% to 49% Profits have stayed basically flat since 2016, with a few spikes From 31% in Q4 2017 to 32% now Investments stay flat, compared to Q4 2017 No change from 25%

Trending The Indicators: Wage Increases

Trending The Indicators: Hiring Increases

Trending The Indicators: Sales Increases

Trending The Indicators: Profit Increases

Trending The Indicators: Capital Investment Increases

Satisfaction with Economy Satisfaction with the economy again hits another all- time positive record More than eight-in-ten (84%) are satisfied: 57.8% “somewhat satisfied” and 26.5%“very satisfied” Of interest: Since June, intensity (very satisfied) shrunk from 30% to 27% Only 14% say they are dissatisfied with the economy – only 3% “very dissatisfied” Satisfaction is strongest in the West Michigan (89%) and Metro Detroit (86%) markets

Satisfaction with Economy As it Affects Your Business

Greatest Challenges To Business “Acquiring & Retaining Talent” are still the greatest challenges to doing business, reaching a new high point of 39% — up from 22% in Q4 2017 “Acquiring talent” (31%) is more challenging than “Retaining” (8%) “Finding/Retaining Customers” increases to 26% — up from 20% in Q4 2017 “Cost of Health Insurance” up ten points to 14% from 4% in Q4 2017 “Wage Inflation” is on the board at 6% Keeping and attracting qualified workers is strongest in the Manufacturing and Construction sectors Managing growth is strongest in the Business and Professional services sector

Top Reasons for Optimism “Economy” 13% - down 1 from Q4 2017 “Business growth” 12% - down 2 Q4 2017 “My customers” 12% - up 3 from Q4 2017 “Business is good” 6% - no change from Q4 2017 “Demand for products/services” 5% - down 2 from Q4 2017 “Great staff” 5% - down from 1 from Q4 2017 “More opportunities” 5% - unchanged from Q4 2017 “Sales and profits are up” 4% - down 5 from Q4 2017 “Political Change/Hope For Reform” 4% - unchanged

Sales and Profit Projections Weaken Some weakness in projected profits and sales indicated Increased profits projections at 49% — down from 53% in Q4 2017 Increased sales projections at 58% — down from 68% in June Expectations for decreases in sales and profits both show upticks since their record lows in June Fewer citing “sales/profits” as their reason for optimism Expectations for increased sales are highest in the Lansing region (61%) and West Michigan (58%). Expectations for increased profits are highest in West and Northern Michigan (53%). Expectations for sales growth is highest (66%) in manufacturing and construction sectors, while profit growth expectations are highest in the financial (64%) and personal services (68%) sectors.

Projected Profits

Projected Sales

Projected Worker Demand Grows Hiring expectations climb. 41% say they plan to hire more employees over the next six months, up ten points from (31%) in Q4 2017. A smaller majority (53%) will maintain staff at current levels, down seven points from 60% in Q4 2017. Only 4% say they plan to lay off employees, holding steady. Hiring projections are highest in Metro Detroit (47%) and Northern Lower Michigan (44%). The personal services sectors most likely to be hiring (52%), followed by manufacturing and construction (46%).

Projected Hiring Trends

Finding Qualified Job Candidates Remains a Top Challenge A majority (52%) are still having difficulty filling open jobs, nearly unchanged since from Q4 2017 (51%). 71% of those actively searching for talent are having difficulty — up four points since from Q4 2017. 60% of those having difficulty blame the lack of qualified applicants — unchanged since from Q4 2017. 31% say positions remain open, while 18% continue to interview, 11% are retraining less-qualified candidates/employees, 11% are relying on business networking and referrals, 6% are hiring temps, 5% are using interns/students/apprentices and 4% are contracting recruiters

Wage Projections At All-Time High Nearly half (45%) plan to raise wages in the next six months — up 10 from Q4 2017 Slightly more (50%) will keep wages unchanged in the next six months — down 2 from Q4 2017 Only three respondents (.07%) plan to reduce wages 4.4% said this question didn’t apply to their business or were unsure of the answer. Projections for wage increases are strongest in West Michigan (54%) and in the Manufacturing and Construction sectors (53%)

Projected Wage Increases Hit High * Only 0.7% Decreasing Wages

Projected Investments & Growth The percentage of those investing in employee training continues to grow to more than 6 in 10 (62%) – up from 45% in Q4 2017 A majority (55%) will invest in advertising – no change from Q4 2017 Three in ten (30%) have more than one business location — up 5% from Q4 2017 7% say they plan to add a new location — no change Nearly 3 in 10 (28%) plan to add a new product line or service — down 2% from Q4 2017

Conclusions: Things to watch While all indicators are strong, there are signs of a possible downturn, with lower projections for sales and profits. Hiring, wages and marketing are primary challenges. Where does this stratospheric economic satisfaction trend go from here? In June, we indicated that the bubble is at risk of bursting. That risk remains. Washington D.C: More than one-third (34%) say the new tariffs have had negative impact on their business. Fewer (32%) say the tax cuts have had a positive impact. Tariffs are creating a drag on the Michigan business economy.

Conclusions: With so much change in both Lansing and Washington, it will be critical to see how tax and regulatory policy will help or hinder business growth. Nearly eight in ten (78%) believe Michigan is a pretty good (55%) or excellent (23%) market for their business (up 8 points from Q4 2017) 7 in 10 (70%) believe state taxes here are mostly (60%) to very (10%) fair (up 11% since Q4 2017) Will business tax policy change in Michigan — and for the better or worse — under the new administration?

Thank you! We appreciate your interest in the MFBI. For more information or detailed findings, please contact Michigan Business Network. http://www.michiganbusinessnetwork.com 109 E. Oakland Ave. P.O. Box 15279 Lansing, MI 48906 (517) 755-9649