Reprinted from CRAIN'S CHICAGO BUSINESS, June 30, 2003

Economic outlook brightens slightly
More hiring, but biz spending lags

They're eating doughnuts again at the Barrington Career Center.

"Every time someone gets a job, they have to bring in doughnuts," says Jane Laystrom, executive director of the job support center, where scores of laid-off white-collar workers have been meeting weekly since the recession began two years ago.

"We've had doughnuts for the past couple of weeks now. We're starting to see people get more interviews, and we've had eight people get jobs in the past three weeks."

The flurry of hiring activity at the north suburban center, while far from robust, is just one sign that the economy is slowly improving. After the uncertainty surrounding the war in Iraq stifled business activity in the first half of the year, the local economy is forecast to accelerate in the third and fourth quarters, making 2003 just slightly better than 2002.

Companies are still hesitant to invest in new equipment and buildings, an essential part of an economic recover. But local business executives say they are more inclined to boost capital spending than they were early in the year and are just waiting for further indications that the economy is on a steady, uphill climb before writing any big checks.

"There are definitely some positive signs," says Vincent Boberski, managing director and chief economist at brokerage firm RBC Dain Rauscher Inc. in Chicago. "But we will have to see some true, top-line revenue growth before we can expect that businesses will be ready to spend again."

The Chicago-area economy is forecast to grow 1.98% in 2003, with the biggest gain coming in the latter part of the year, according to data compiled for CRAIN'S C by the Regional RAIN'S by the Regional Economics Applications Laboratory (REAL) at the University of Illinois at Urbana-Champaign. Growth is expected to accelerate to 2.16% in the second half, compared with 1.78% in the fi rst half, according to REAL.

The latest regional outlook for 2003 is less rosy than the 2.37% uptick REAL had predicted when the year began. But it's an improvement over the 1.16% gain calculated by REAL in 2002.

No big bounce expected
Nationally, economists' predictions for the gross domestic product increase range from 202% to 2.5%, with second-half gains ranging from 3.0% to 4.0%. Chicago's economy lags the nation's, largely because of its heavy reliance on the hard-hit manufacturing, which makes up one-quarter of the local economy, is key to the region's recovery, economists say.

A few measures of national manufacturing activity released in recent weeks point toward a recovery. But many executives and economists aren't convinced.

"My people are telling me that they stopped losing business, but there's not any big rebound yet," says Michael Heisley, chairman and CEO of Heico Cos. LLC, a Chicago-based holding company for firms in construction, manufacturing and telecommunications."My take is that we've hit the bottom and we're just not going to bounce back like we have in recessions in the past."

DSC Logistics Inc., a warehouse and distribution company based in Des Plaines, is dusting off plans for a 1-million-square-foot distribution facility at an industrial park at the former Joliet Arsenal. The plan, which originally called for completing the giant warehouse by 2002 and another 1-million-square-foot facility a few years later, was put on ice when the economy soured. Now, CEO Ann Drake is considering building the warehouse by next summer.

"The first quarter was pretty dark for almost everybody," says Ms. Drake. "Most of it was due to the uncertainty around the war. I definitely feel in the spirit and behavior of the people around me that the gloom has lifted."

Jacqueline Hayes, a retail real estate broker catering to upscale stores, says interest has picked up among retailers looking to rent space. But few are ready to sign a lease, preferring to wait until after June, when half-year sales fi gures are tallied, before making any decisions.

"There is increased interest, but people are extremely cautious about going forward with any kind of deal," says Ms. Hayes. "They really overanalyze things to make sure they are not expanding capital unnecessarily."

Nationwide, capital spending is forecast to increase 1.1% this year, after a 5.7% decline in 2002, according to New York-based investment banking firm Morgan Stanley. The big pickup isn't expected until 2003, when the firm predicts capital investment will jump 11.2%

Much of this year's expenditures are aimed at updating computer systems. Corporate spending on information technology systems is estimated to grow 2% this year, according to Forrester Research Inc., a Cambridge, Mass.-based technology research company.

Most of the money is ear-marked for new hardware and software, where discounts abound, rather than for hiring, says Forrester analyst Andrew Bartels. Jobs in the field are still hard to find, and salaries are flat.

In the meantime, consumer spending—which accounts for two thirds of the U.S. economy and has fueled the recovery so far—will have to keep the economy moving forward. The $350-billion tax cut package that President George W. Bush signed into law last month will help on that front by putting more money into consumers' pockets, economists say.

Positive signs
As for jobs, Illinois received a smidgen of good new last month. The state unemployment rate fell 0.2 of a percentage point in May, to 6.1%, its lowest level in 16 months and the fi rst time since early 1999 that the jobless rate in Illinois was equal to or lower than the nation's. Nationally last month, unemployment hit a nine-year high of 6.1%

Another positive sign: Temporary hiring has increased, an early indicator of job recovery.

Snelling & Snelling Inc, a Dallas-based temporary staffing agency, has posted a 14% increase this year in temporary staffing revenues, with a "clear pickup in the Midwest," says President Linda Paulk, who notes,

"The phones are ringing again."
© Copyright June 30, 2003, Crain's Chicago Business. All rights reserved. Used with permission.

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