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- Services firms saw declining sales and employment over past year, but year-ahead outlook is mildly positive
- Profits were down amid rising input costs; firms expect further inflation
- Though head counts fell, labor supply remains tight
Businesses of all types and sizes have been buffeted by shocks over the last year from trade policy to energy-price spikes, and those in the services sector are no exception. “Feels like the field, the rules, and the goal posts are constantly changing,” commented an engineering firm in South Dakota. “Need more stability.”
Despite all this volatility, services firms in the Ninth Federal Reserve District still have an overall positive outlook for growth at their businesses over the coming year, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. Though firms have seen flat sales and declining employment over the past 12 months, they are expecting improvement in the year to come.
These results reflect responses from nearly 250 firms in advertising, consulting, legal, and other professional and technical services across the Ninth District. The survey, conducted from late April through May, asked respondents about their experience over the previous four quarters, rather than the calendar year, and their outlook for the coming four quarters.
Respondents generally saw stable activity or slight growth over the past year. The figure presents survey results as a diffusion index, which indicates an increase or decrease. Values above 50 indicate expansion; below 50 indicate contraction.
Demand was nearly flat on balance, as sales revenue increased for 41 percent of firms surveyed over the past year while 40 percent saw sales fall. However, profits declined. This was likely due to surging input costs, because productivity increased on balance, possibly offsetting what could have been an even greater decline in margins.
With respect to inflation, 44 percent of respondents indicated that they increased the prices they charge to clients over the past year. Meanwhile, 79 percent reported an increase in their input costs.
Employment at services firms fell somewhat overall, as 29 percent of respondents reported having decreased staffing at their firms compared with 19 percent that increased employment. Despite weaker employment, the supply of workers remained tight, and 28 percent reported worker availability decreased.
Growth in compensation slowed from the last few years. Wages increased 3.3 percent on average over the previous 12 months (compared with 3.7 percent in last year’s survey), while employee benefit costs increased by 3.7 percent, according to respondents.
Interest rates had a minor impact on business conditions, according to most firms. Half of respondents reported no changes to their business due to credit conditions. However, 15 percent said they decreased capital spending because of tighter credit, and 14 percent said they decreased hiring.
Looking ahead, services companies were somewhat optimistic about the coming 12 months. A substantially larger share of firms anticipated higher sales revenues over the next four quarters (42 percent) than those that expected declines (28 percent). Similarly, a larger share expected profits to rebound slightly. Productivity was also expected to increase. More firms also planned to add workers than to cut staff, though most respondents expected to keep employment the same.
Services firms also expected price pressures to continue: 68 percent expected to pay more for inputs, while only 3 percent foresaw reduced costs. Just over half anticipated no change to the prices that they charge to customers, but 39 percent expected to increase prices further in the year ahead. Respondents also expected continued wage moderation as well; over the next four quarters, firms expected wages to increase by an average of 2.5 percent, and benefits were forecast to increase 3 percent.
Even with rosy outlooks for their own businesses, services firms had pessimistic forecasts for general economic conditions. The outlook for consumer spending was especially weak; more than half of respondents expected spending will fall in their states over the next 12 months. Though they said they may add staff at their own operations, a third of respondents expected employment in their state to decrease over the next year. The outlook for corporate profits was also net negative. Regarding inflation, three-quarters of respondents predicted it will increase in their state over the next 12 months, while only 4 percent predicted inflation will fall.
| Total (239 responses) | ||||||
|---|---|---|---|---|---|---|
| How did your location perform during the last four quarters compared with the previous four quarters? | Up | Same | Down | Diffusion index* | ||
| Sales revenue | 40% | 19% | 41% | 50 | ||
| Profits | 34% | 17% | 49% | 42 | ||
| Productivity | 28% | 48% | 23% | 53 | ||
| Employment level | 19% | 51% | 29% | 45 | ||
| Labor availability | 14% | 58% | 28% | 43 | ||
| Selling prices | 44% | 49% | 7% | 68 | ||
| Input costs | 79% | 19% | 2% | 88 | ||
| Space occupied (square footage) | 6% | 88% | 6% | 50 | ||
| Exports (sales to foreign clients) | 3% | 87% | 10% | 46 | ||
| How do you expect your location to perform during the next four quarters? | ||||||
| Sales revenue | 42% | 30% | 28% | 57 | ||
| Profits | 39% | 25% | 36% | 51 | ||
| Productivity | 33% | 50% | 18% | 58 | ||
| Employment level | 24% | 61% | 18% | 54 | ||
| Labor availability | 8% | 69% | 23% | 42 | ||
| Selling prices | 39% | 52% | 9% | 65 | ||
| Input costs | 68% | 29% | 3% | 83 | ||
| Space occupied (square footage) | 10% | 80% | 10% | 50 | ||
| Exports (sales to foreign clients) | 2% | 89% | 10% | 46 | ||
| What is your outlook on the following state economic indicators during the next four quarters? | ||||||
| Employment | 14% | 54% | 32% | 41 | ||
| Consumer spending | 10% | 36% | 54% | 28 | ||
| Inflation | 74% | 21% | 4% | 85 | ||
| Corporate profits | 22% | 38% | 40% | 41 | ||
| Mergers and acquisitions | 27% | 62% | 10% | 58 | ||
| Previous four quarters | Decrease | 0% | 1%–2% | 3%–5% | 6%–10% | >10% |
| Wages per worker | 3% | 18% | 14% | 55% | 8% | 3% |
| Benefits per worker | 6% | 29% | 6% | 29% | 14% | 15% |
| Next four quarters | ||||||
| Wages per worker | 4% | 26% | 18% | 49% | 2% | 2% |
| Benefits per worker | 5% | 37% | 10% | 25% | 13% | 9% |
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.
