Oct. 9, 2023

There’s some clear softening in business activity and expectations for the rest of the year among Sioux Falls CEOs.

That’s according to the most recent SiouxFalls.Business quarterly CEO survey, conducted in partnership with the Augustana Research Institute.

The latest survey was conducted during mid-September and completed by more than 70 CEOs and business owners.

Fifty-nine percent said conditions at their business are good, while 16 percent said they are excellent, 20 percent said they’re fair, and 5 percent said conditions are poor. That’s down from 61 percent saying conditions were good and 24 percent considering them as excellent three months ago.

Nearly one-third said sales activity dropped slightly or significantly in the past quarter, up from one-fourth of CEOs in the second quarter. In the third quarter, 47 percent saying sales increased slightly or significantly.

More CEOs also are reporting increased prices, with 61 percent noting slightly or significant increases in the past quarter, with 34 percent saying there had been no change and 5 percent reporting a slight or significant decrease.

The results “confirm what we’re hearing from our business visits,” said Bob Mundt, president and CEO of the Sioux Falls Development Foundation.

“High interest rates and expensive capital with inflation adjustments have caused a slow in hiring along with an increase in pricing,” he said.

“One could argue then that slowing business activity along with interest rates is slowing capital outlay and (leading to) a wait-and-see attitude among our business leaders. This in turn is causing the decrease in how businesses view the business climate in Sioux Falls and across the nation.”

Businesses continue to hire. More than one-third reported slight or significant hiring increases in the past three months, with 9 percent reporting slight or significant decreases.

Looking ahead, more than half of CEOs are anticipating average hiring through the end of the year, with two in 10 CEOs expecting hiring to be below average.

Capital spending also appears to be slowing, with 15 percent of CEOs expecting above-average capital expenditures and nearly three in 10 expecting below-average spending.

A greater percentage of CEOs expect below-average business activity in the fourth quarter. That rose to 21 percent, compared with 11 percent in the previous quarter. The percentage expecting average activity was flat, while the decline came in those predicting above-average conditions, dropping to 23 percent compared with 36 percent in the previous quarter.

“These responses suggest that we are experiencing a soft landing at the national and local level,” said Reynold Nesiba, a professor of economics at Augustana University.

“Overall rates of inflation are coming down. According to the U.S. Bureau of Labor Statistics, inflation in August rose 3.7 percent over the previous 12 months. This is down from a peak of 9.1 percent in June of 2022. Despite disinflation, economic growth persists — 2.1 percent in the third quarter — and the labor market, particularly in South Dakota, remains tight. I am surprised and pleased that that the Fed’s 11 interest rate hikes beginning in March 2021 have not had a more contractionary effect.”

CEOs also are softening in their perceptions of both the Sioux Falls and national business climates. While 79 percent still rate Sioux Falls as good or excellent, that’s down from 95 percent three months ago.

Views on U.S. business conditions also dropped, with a majority rating it as fair and 15 percent calling it poor.

“The overall economy faces at least four possible sources of headwinds: the government shutdown has been avoided for now, the war in Ukraine continues, the United Auto Worker strike expands and the Fed will meet at the end of October and again in December to decide whether to raise interest rates further,” Nesiba said.

In addition to the Sioux Falls Development Foundation, survey results are provided to the Federal Reserve Bank of Minneapolis to assist in its understanding of area business conditions.

The overall survey “is a return to something that looks like more normal activity of a typical region, where sentiment is more of a traditional bell curve rather than really top heavy with activity and optimism like it was for much of the last couple of years,” said Ron Wirtz, regional outreach director for the Minneapolis Fed.

Some of the results, such as sales and new hiring, aren’t bad if they’re looked at without historical context, he added. But looked at on a year-over-year basis, a decline in both is evident.

“And these measures almost had to slow; at some point there had to be some regression to the mean, some return to the slow-growth patterns seen elsewhere in the country,” Wirtz said. “And mind you, this is still a growth story, and Sioux Falls is still somewhat more positive than I see in neighboring states.”

There’s a similar slowing when considering future expectations, he added.

“The sales chart is almost a perfectly balanced bell curve – similar sentiment for below average as above average and a big bulge saying not much change,” Wirtz said. “Of course, you also have to acknowledge that ‘average’ among these firms over the past couple of years has been quite positive. So I wouldn’t want to overstate the case.”

One unknown that could present a concern involves smaller firms typically not captured in the survey, he added.

“From our surveys, we know that small businesses have performed more poorly when it comes to revenue trends, and they’ve been less successful hiring workers,” Wirtz said. “They also have less leverage in negotiating prices with vendors, so they are often facing more pressure on profit margins. So if larger firms in the region are seeing some overall slowing, my sense is that smaller companies might also be feeling proportionally more pressure.”

Sioux Falls Development Foundation resources

Do you have further information to share about conditions at your business? Or are you looking to connect to additional resources to support your growth? The Sioux Falls Development Foundation can assist you in the following areas:

• Workforce development: The Development Foundation offers programs and initiatives to help you attract, retain and develop your workforce. Contact Denise Guzzetta, vice president of talent and workforce development, at 605-274-0475 or [email protected].
•  Business growth and expansion: Whether your business is planning an expansion in the next five years or facing risk factors impacting growth, the Development Foundation can help by discussing existing building space, available land, potential local and state incentives and other resources. Contact Mike Gray, director of business expansion and retention, at 605-274-0471 or [email protected].