Madeline Christensen - fedgazette Intern
Toby Madden - Regional Economist
Published July 1, 2009 | July 2009 issue
Accountants, architects, engineers, market researchers and other firms that support businesses experienced a significant decrease in profits over the past year, according to results of the annual survey of professional services firms, conducted in May of 2009 by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.
Prices, employment and sales revenue decreased slightly, according to survey respondents. Coupled with a significant increase in input costs, those decreases resulted in plunging profits. In addition, office space usage was flat, exports dipped and productivity increased only slightly (see chart and data [xls]). Looking ahead to the next four quarters, firms expect input costs to continue to increase and profits to stabilize. The firms' views on state economies are dire, as respondents predict increases in inflation and unemployment paired with decreases in consumer spending and corporate profits.
"I'm extremely tired of this crappy economy," commented a South Dakota Web design firm executive. Sales revenue slid, with 43 percent of firms reporting decreases and 35 percent reporting increases. Most of the decreases occurred in reduced volume, as selling prices fell slightly. Input costs, however, increased substantially. Forty-nine percent of firms reported higher input costs, and only 7 percent reported lower input costs. Average wages also increased 2.5 percent, and benefits per worker increased 2.1 percent, although labor availability increased appreciably. In contrast, the employment level dipped slightly, with 29 percent of firms reporting decreased employment and 18 percent reporting increased employment. As a result, profits for firms fell significantly. Only 28 percent of firms reported an increase in profits, and 51 percent reported a decrease.
The outlook for the next four quarters indicates stable profits after the past year's plunge. "We have begun the upturn—the worst is over," said a respondent from a facility optimization services firm in Minnesota. Firms expect revenue and profits to stay roughly constant and productivity to increase slightly. Thirty-one percent of firms expect labor availability to continue to increase, and only 4 percent predict a decrease. Respondents expect the employment level to remain the same and prices to stay level, but expectations of higher input costs will likely offset increases in productivity. Tighter credit could be having an impact on the sluggish outlook. Nearly a third of the respondents reported that tighter credit is restricting future plans for capital expenditures. To a lesser extent, tighter credit is restricting employment and inventory levels.
Respondents' outlook for their state economy overall shows fears of inflation and decreased corporate profits. Fifty-seven percent of firms predict higher inflation, and only 5 percent predict lower inflation. About half of the respondents expect corporate profits to decrease, and 17 percent predict increases. Firms also predict a decrease in overall employment and consumer spending.
Of the approximately 20,000 Ninth District professional business services firms (most firms in NAICS code 541), a stratified random sample of 2,300 businesses was drawn from the population. For each state, the population was stratified based on employment size; the sample includes 100 percent of establishments with more than 49 employees, 30 percent with 5 to 49 employees and 4 percent with fewer than 5 employees.
A postcard survey was mailed to each of the selected businesses. The mailing was sent in early May, and a second mailing was sent in mid-May to businesses that did not respond to the first mailing. A cutoff for survey responses was May 31. A total of 485 usable surveys were received, for a response rate of 22 percent.
Survey results were tabulated for all professional business services firms. The confidence interval for sampling error was calculated. The 95 percent confidence interval for the results is plus or minus 4.4 percentage points. Results are also subject to errors introduced by other factors, such as the wording of questions and differences between survey respondents and nonrespondents.
Note: The Minnesota Department of Employment and Economic Development produced and processed the surveys for Minnesota firms, and the Federal Reserve Bank of Minneapolis conducted the survey for manufacturers in Montana, North and South Dakota, Ninth District counties in western Wisconsin and the Upper Peninsula of Michigan.
See survey data. [xls]