Professional services firms expect sluggish activity over the next year

Profits fell slightly over the past year at firms that support businesses, such as accountants, architects, engineers and market researchers, according to results of the annual survey of professional services firms, conducted in May and early June of 2008 by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

The survey shows that selling prices and productivity increased, but input costs increased faster, which reduced profits. Employment, office space usage and exports were relatively unchanged over the past 12 months. Responding firms expect flat activity at their businesses over the next four quarters. Input costs are expected to shoot up more than sales prices. Firms do not plan to add employees or office space. They expect the overall economy to perform poorly over the next 12 months.

Revenues increased slightly on average over the past year, with 47 percent of respondents reporting higher revenue and 34 percent reporting lower revenue. Much of this revenue increase may be due to higher selling prices for products, since 38 percent of respondents indicated increasing prices and 12 percent indicated decreasing prices. Productivity rose at 36 percent of the respondent firms and decreased at 15 percent. Input costs rose at 72 percent of responding firms, and only 2 percent reported decreasing costs. Average wages increased 3 percent, while benefits grew 2.6 percent. Overall, this resulted in slight decreases in profits. Meanwhile, employment and space usage were flat.

A special question this year asked how tighter credit conditions are affecting businesses. The responses indicate that the credit crunch has had a negative impact on professional business firms' revenues, capital expenditure plans and employment.

The outlook for the next four quarters is for level activity. Service firms expect slightly increased sales revenue and continued productivity growth. Employment and office space usage are forecast to remain flat. Higher input costs (for example, rent, supplies, consultants) and selling prices are anticipated, and profits are expected to remain flat. Respondents expect average wage and benefit costs per worker to increase 2.5 percent and 2.2 percent, respectively, over the next 12 months. "Overall, [the] economy will reduce possible expansion of our business," said an architect from North Dakota.

The outlook for the overall economy is downbeat. For the next four quarters, respondents expect lower employment, consumer spending and corporate profits and higher levels of inflation. Thirty-seven percent predict employment to decrease, and 16 percent foresee employment gains; 63 percent of respondents expect consumer spending to decrease, and 11 percent expect it to increase. Half of the firms think corporate profits will decrease, while 16 percent expect corporate profits to increase. Over three-quarters of the responding firms forecast increasing inflation, and only 1 percent anticipate that inflation will moderate.

See survey data. [xls]