Not so bad

Unemployment in Minnesota sits below 3 percent. Labor market participation is high. Airport traffic counts across the country are approaching and even surpassing pre-pandemic levels, so consumers are still spending money. 

Consumer confidence, reportedly spurred by the strong labor market, also seems at least cautiously on the rise.

And yet, inflation remains high, some business sectors are struggling mightily. Supply chain issues — though largely stabilized in the big picture — still plague certain industries. And, in early July, Reuters cited research from PitchBook indicating a first half of the year decrease of 48 percent globally in venture capital investment, with the U.S. declining by 65 percent.

So, who is right?

The somewhat contradictory mix of indicators has local experts in various sectors optimistic that there isn’t a bottoming out on the way, but also realistic in that the recovery will likely remain slow — and better for some industries than others.

“My personal opinion is I think we’re going to be just fine,” says David Russick, founder and managing partner of Gopher Angels. “I don’t see us going into a recession. I think there will be sectors within the economy that will be in recession, which we’ve seen before. But with the unemployment rate under 4 percent, with consumers still spending — maybe differently, but still spending — I’m not really worried about the country going into the recession.”

Banks, investors still making deals

Russick emphasizes that he runs a network of 80 individuals, not a fund. Each individual investor may see things differently. He’s upbeat. “Everything points to continued slow growth,” he says. Founded just over a decade ago by him and his wife, Sara Russick, Gopher Angels is on track to do more deals this year than it has the last few years.

He acknowledges there are market challenges, though. One thing the Gopher Angels network has seen this year is that follow-up funding is harder to find, meaning the larger amounts typically sought after the seed and Series A funding rounds his group provides. 

“It’s been a little bit more highlighted — we like this company, we’re going to invest, but one of the diligence points is ‘Do we think they can get follow-on funding and keep growing or are they going to fail even though we funded them because they can’t continue to grow,’” he says. “It’s a bigger issue than I’ve seen in the past.”

He suggests those targeting funding consider lean growth and perhaps finding strategic partners earlier as a sign of market interest to future funders. “It’s a positive,” Russick says, “if we see the early-stage company have somebody like Johnson & Johnson or Medtronic showing some interest.”

Banks investing

Melissa Johnston, chief commercial officer at EntreBank, says she also has heard confusion and concern over conflicting indicators. She adds the companies her bank has partnered with collectively seem to be doing pretty well. “I haven’t seen anything that would lead me to believe people are struggling.”

EntreBank is taking a bit more time in underwriting, analyzing applicants’ risk to make sure they have considered what would happen if the economy did dip, she says. 

At the same time, EntreBank has not declined anybody solely due to the economy, Johnston says, adding that those seeking loans and lines should have some cash on hand to deal with potential bumps and be crystal clear in their budget forecasts how they are getting to their numbers. 

“And I would say look at overall efficiency,” she says. “There have been ways with different technologies to build more efficient processes and procedures. That feels like a good practice.”

Logistics concerns easing

One of the biggest causes of indigestion in recent years has been the supply chain. Again, it’s industry-specific, but the worst of those concerns seem to have passed, says Emily LeVasseur, co-founder and managing director at Waypost Advisors.

Electronics-oriented companies, where circuit boards and chips are still difficult to come by, are having the toughest time right now. 

But consumer demand is steady. Discretionary spending is a little under the gun, she says, because inflation has raised prices on day-to-day required goods. That said, holiday goods are likely inbound or close to reaching shores on the West Coast.

Transportation prices are relatively low, so some consolidation is likely coming in steamship lines and trucking. And warehouse space, which has been constrained because there is a lot of built-up inventory, should be easing up with new capacity coming online in the next six to 12 months, she says, especially in non-temperature sensitive dry goods storage. So, it’s not perfect, but it’s a lot better. “I think things are fairly stable where they are,” she says.

But there are some issues looming. In the longer-term, she says, geopolitical and environmental issues, like drought, could cause problems. More immediately, contract discussions between the United Parcel Services (UPS) and the Teamsters union stalled in early July, creating the specter of a potential strike of 340,000 workers.

“That would be ridiculously disruptive,” she says. “For parcel and ground shipping, you basically have UPS, FedEx and the U.S. Postal Service.”

Trucking company Yellow, formerly known as YRC Worldwide, could file bankruptcy, too. The low-priced less-than-truckload (LTL) shipper’s struggles could be a big deal because of the intricacies of the LTL market and the likely price increases required by switching carriers. “It’s not as easy to switch carriers when it’s LTL shipping as it is when trucks are carrying your full load.”

For those enjoying a reprieve from shipping concerns, LeVasseur says this would be a good time for companies who need better planning processes and systems to work on upgrades. “If things feel like they are getting a little more peaceful on the supply chain front, it’s not a bad idea to really dig in and fix the stuff that was broken.”

Money for mergers

Greg Loeschke is bullish about the status of M&A, as well, at least in his lower-middle market area, though that also is industry specific.

The managing director of Lingate Financial Group works primarily with lower-middle market companies typically doing revenues between $5 million and $50 million in revenue. He heard at a conference last month that activity within larger market sectors has been tougher and he suspects the same is true with smaller “Main Street” businesses.

But he’s been busy and he sees signs that will continue. He’s seen booms in M&A during the lead-up to the last two presidential elections and he expects that trend to continue.

He also has seen significant activity this year from companies that struggled during COVID but have spent the last couple years recovering and re-establishing their consistent financial performance. He expects that to continue over the next year or two. Keeping a clean balance sheet is key.

“There’s not that interest cost burdening these businesses,” he says. “That makes a difference. They’ve got some flexibility, working capital, lines of credit, but no term debt.”

There are buyers. Those low debt loads have left banks with money to lend. And there is, he says, literally trillions in committed private equity capital available. 

“The lenders are really motivated,” Loeschke says. “They want to put money to work, especially in this higher interest environment. There’s equity money out there. There’s debt. You still have an active SBA program on the lower end of what we look at. There is money out there looking to back solid acquisition opportunities.”