April 3, 2023

Nearly four in 10 Sioux Falls CEOs saw some drop in sales to begin 2023, though overall they reported fairly favorable business conditions.

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-March and completed by nearly 70 CEOs and business owners.

Eighty-three percent of CEOs said conditions at their business were good or excellent, with just 1 percent calling them poor. That’s slightly stronger than three months ago though a drop compared with a year ago.

“My sense is that the fundamentals in Sioux Falls and the surrounding area remain strong. We have continued strong population growth, improving weather conditions after a long and snow-filled winter and are coming off two record years of building permits and construction,” said Reynold Nesiba, a professor of economics at Augustana University.

“At some point this or next year, I do expect that declining federal stimulus and rising interest rates are going to temper rates of investment, hiring and overall growth.”

Since the beginning of the year, the upper limit target of the federal funds rate has increased from 4.5 percent to 5 percent, he pointed out.

“A little over one year ago, on March 15, 2022, that target was only .25 percent. This series of sharp and rapid interest rate increases has been associated with the failure of both Silicon Valley Bank and Signature Bank,” Nesiba said. “These rate hikes and the growing financial instability likely, and rightly, contribute to CEO perceptions of low and declining overall business climate in the U.S. despite other favorable economic data. Despite this, they remain optimistic and appear to be navigating these changes at the local level.”

Survey results also are provided to the Sioux Falls Development Foundation and the Federal Reserve Bank of Minneapolis to assist in their understanding of area business conditions.

“In general, Sioux Falls businesses still seem to be faring well,” said Ron Wirtz, regional outreach director for the Minneapolis Fed.

“It seems that business activity and overall conditions has come down over the last year from ‘spectacular’ to simply ‘quite good.’ If I were to see this kind of sentiment elsewhere for a recent, single survey, I would assume things are improving because all of the metrics are net positive as a point in time. The fact that Sioux Falls has ‘fallen’ to these positive levels sort of underlines how strong that market has been.”

He keyed in on the change in sales activity in the past quarter, where 38 percent reported a slight or significant decrease.

“If I look only at sales activity, I would characterize it as a pretty clear indicator of some softening, but from exceptional levels,” Wirtz said. “This question is arguably the most important and also the one with the softest result.”

However, 48 percent did see either a slight or significant sales increase, and “that’s not actually that bad,” he continued. “It’s higher than the previous quarter — 43 percent — but significantly lower than last first quarter — 70 percent — which is arguably a better comparison period because sales in many industries are often seasonal.”

Also, lower sales activity doesn’t necessarily mean a business isn’t still profitable, he added.

Nearly two in three CEOs reported prices for their products and services had slightly or significantly increased to start the year.

“Looking at past surveys, nearly everyone was seeing higher sales – and strongly higher sales for many; at some point that’s a bit unsustainable,” Wirtz said. “But more so than any previous survey, there is more of a barbell response to sales activity — either you were growing or declining in sales, not many seeing flat sales, and that’s a bit unusual and suggests there might be a bit more volatility in business activity of late.”

Forty-three percent of CEOs reported an increase in hiring to start the year, with 10 percent noting a slight or significant decrease.

“New hiring remained positive, especially on a net basis, with some slight pullback,” Wirtz said. “We’re seeing the same trend in job postings generally and for lots of different reasons: slowing sales, some are simply tired of the labor chase and are choosing different labor and related operational strategies to deal with tight labor markets.”

For the coming quarter, one-third of CEOs said they expect above-average business activity, with 48 percent expecting it to be average and 17 percent expecting below-average activity.

There has been “a modest decline in those expecting growth, but still healthy by any measure,” Wirtz said.

“The ‘top of the top’ seems to have come down across the board. By that, I mean the share picking the exceptional or top positive answer is down mostly across the board, and there is a general but modest shift lower in the sentiment of most questions.”

Three in four CEOs expect average or above-average hiring for new positions in the next three months.

Nearly three in four also expect average or above-average capital spending in the coming quarter.

When asked to rate the overall business climate in Sioux Falls, CEOs are more enthusiastic than they were three months ago, with nearly 90 percent rating it good or excellent.

Their perceptions of the U.S. economy appear to have deteriorated slightly in the past few months, with about the same rating it good or excellent but slightly more rating it poor.

“This is up slightly from last quarter but remains surprising low given actual national conditions,” Nesiba said. “The U.S. economy was characterized by 2.6 percent GDP growth in the fourth quarter, 3.6 percent national unemployment in March and 6 percent inflation from February of 2022 to February 2023. This is down from a 9.1 percent annual inflation rate in June of 2022. Despite steady growth, low unemployment and declining inflation, local CEOs see the national economy as far less robust than the one they help guide in Sioux Falls. CEOs remain bullish about Sioux Falls.”

He said he’s “unsettled” by a recent Bureau of Economic Analysis report that found South Dakota had the slowest economic growth of any state in the country in the fourth quarter of 2022, with real GDP falling 4.3 percent. The report noted the decrease likely is related to declining earnings for that period in the agriculture sector though it didn’t detail a cause.

“My conversations with two different farmers suggest that this is weather related and perhaps also a timing issue. It has been a brutal winter, and farmers wishing to bring corn or soybeans to market would have found that difficult and in some cases impossible,” Nesiba said.

“The fourth quarter had strong corn and bean prices. Many farmers were able to sell from their combines rather than delay their sales hoping for even higher prices in the future. Given those strong earnings, it might also have made sense to update equipment and expense that out in the 2022 tax year. Thus, strong earnings and spending in the fourth quarter have been followed by fewer grain sales and equipment purchases in the first quarter. Hopefully, we see a strong rebound in the second quarter.”

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].