Inflation may have cooled somewhat at a national level according to the official statistics, but businesses in the region are still feeling the pinch. “Costs to do business have increased so much it is almost impossible to do business,” said an engineering firm in Michigan’s Upper Peninsula.
But even in the face of cost pressures, professional services firms in the Ninth District saw generally stable activity over the past year, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. These businesses anticipate mild growth for their firms and in the broader economy over the coming year.
The results reflect responses from 332 firms in research, marketing, design, consulting, accounting, and other professional services across the region. The survey, conducted in May and June, asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the next 12 months.
Despite price volatility, the past year was financially stable overall for firms in the services sector. Figure 1 presents survey results as a “diffusion index,” which indicates an increase or decrease on average over the previous four quarters. Values above 50 indicate expansion and below 50 indicate contraction.
More than 40 percent of firms reported increased sales revenue over the past year, compared with a third who saw sales fall. Profits and employment levels declined on balance over the period, while productivity increased, but these summary numbers obscure some of the variability in survey results. Although a slightly higher proportion of respondents noted that profits had decreased rather than increased, just over half said employment was steady and a strong majority indicated no change to productivity.
Turning to inflation, nearly two-thirds of respondents reported an increase in their input costs, down from 75 percent on last year’s survey. Half of firms reported that they increased the prices they charge to clients, which is about the same share as a year ago.
Nearly half of businesses surveyed said that labor had become less available, while only 5 percent reported an increase in labor supply. Even so, increases in employee compensation were only modestly higher on balance than last year’s survey results. Wages per worker rose less than 5 percent on average, while benefits costs increased just under 3 percent, according to respondents.
A special question on this year’s survey asked businesses about specific sources of inflation and how they have changed relative to 2022 (Figure 2). The most troublesome sources of price pressure appear to be technology, utilities, and materials costs, as more than 60 percent of respondents indicated that those got worse since last year. One of the only sources of inflation that got notably better is supply chain disruptions.
Interest rates are another cost of business that has increased recently, as the Federal Reserve has tightened monetary policy to bring inflation down. More than half of firms reported no changes to their business due to credit conditions. However just under a quarter said they had decreased their capital spending because of tighter credit, and 1 in 8 said they decreased their hiring.
Looking ahead, services companies are mildly optimistic about the coming 12 months. More firms anticipate increased revenues over the next four quarters than expect declines, while expectations for profits are still down slightly. Productivity and employment are also expected to increase on balance, though most firms expect these indicators to stay level.
Firms also expect inflationary pressures to continue; 58 percent expect to pay more for inputs, while only 3 percent foresee reduced costs. Just over half anticipate no change to the prices that they charge to customers, but 39 percent expect to increase prices further in the year ahead. Surprisingly, given higher inflation and poor labor availability, most nonetheless anticipate relatively modest wage increases: Over the next four quarters, firms expect wages to increase by an average of slightly more than 3 percent, and benefits are forecast to increase by less than that.
Looking outside their businesses, respondents had modest forecasts for general economic conditions. While respondents expect employment in their states to increase on balance over the next year, outlooks for consumer spending and corporate profits are negative. With regard to inflation, two-thirds of respondents predict it to increase in their states over the next 12 months, while only 9 percent believe that inflation will fall.
Total (332 responses) | ||||||
---|---|---|---|---|---|---|
How did your location perform during the last four quarters compared with the previous four quarters? | Up | Same | Down | Diffusion index* | ||
Sales revenue | 43% | 24% | 32% | 56 | ||
Profits | 34% | 27% | 39% | 47 | ||
Productivity | 27% | 51% | 22% | 52 | ||
Employment level | 17% | 61% | 22% | 48 | ||
Labor availability | 5% | 51% | 44% | 31 | ||
Selling prices | 50% | 42% | 8% | 71 | ||
Input costs | 64% | 33% | 3% | 81 | ||
Space occupied (square footage) | 7% | 86% | 7% | 50 | ||
Exports (sales to foreign clients) | 3% | 92% | 5% | 49 | ||
How do you expect your location to perform during the next four quarters? | ||||||
Sales revenue | 35% | 41% | 24% | 56 | ||
Profits | 26% | 43% | 31% | 48 | ||
Productivity | 22% | 63% | 15% | 54 | ||
Employment level | 19% | 66% | 15% | 52 | ||
Labor availability | 8% | 63% | 29% | 40 | ||
Selling prices | 39% | 52% | 8% | 66 | ||
Input costs | 58% | 39% | 3% | 77 | ||
Space occupied (square footage) | 5% | 88% | 7% | 49 | ||
Exports (sales to foreign clients) | 3% | 95% | 3% | 50 | ||
What is your outlook on the following state economic indicators during the next four quarters? | ||||||
Employment | 27% | 53% | 19% | 54 | ||
Consumer spending | 18% | 39% | 43% | 37 | ||
Inflation | 67% | 24% | 9% | 79 | ||
Corporate profits | 23% | 38% | 39% | 42 | ||
Mergers and acquisitions | 33% | 52% | 15% | 59 | ||
Previous four quarters | Decrease | 0% | 1%-2% | 3%-5% | 6%-10% | >10% |
Wages per worker | 4% | 23% | 7% | 30% | 19% | 17% |
Benefits per worker | 3% | 46% | 10% | 18% | 13% | 10% | Next four quarters |
Wages per worker | 4% | 29% | 11% | 39% | 11% | 6% |
Benefits per worker | 2% | 47% | 11% | 26% | 8% | 5% |
Joe Mahon is a Minneapolis Fed regional outreach director. Joe’s primary responsibilities involve tracking several sectors of the Ninth District economy, including agriculture, manufacturing, energy, and mining.