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Professional services firms see expansion

July 12, 2017


Joe Mahon Director, Regional Outreach
Professional services firms see expansion

Professional services firms in the Ninth District grew over the past year and anticipate continued expansion at their firms, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

Over 370 firms in accounting, engineering, graphic design, marketing, consulting and other professional services across the Ninth District responded to the survey, conducted in May and June. The survey asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the coming four quarters.

For the most part, the past year was a financial success for professional services firms in the region. The accompanying chart 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; below 50 indicate contraction.

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Roughly two in five firms reported increased sales over the past year, while a third saw steady sales. Business services employment and productivity also expanded over the period. Profits, in contrast, were flat on average, with roughly equal proportions of businesses saying they increased, decreased or stayed the same.

Many firms also noted an increase in input costs and the prices they charge for services. In response to a separate question, most reported that credit conditions were a minor factor in hiring or capital spending decisions.

However, one in four said that labor had become less available, while only 5 percent reported an increase in labor supply. Wages and benefits each rose 2.5 percent on average, according to respondents.

Going forward, services companies are optimistic about the coming year. In the survey, more firms anticipate increased revenues and profits over the next four quarters than expect declines. Productivity and employment are also expected to increase, on balance, though a majority of firms expect these indicators to stay level.

About a quarter of firms intend to raise prices, while only 6 percent expect to cut prices. Planned price hikes may in part be a response to higher costs; 42 percent of firms expect to pay more for inputs, while only 3 percent foresee reduced costs. Most anticipate modest wage increases; over the next four quarters, firms expect wages to increase by an average of 2.3 percent and benefits by slightly less.

Regarding general economic conditions, the number of professional services firms expecting employment in their states to rise over the next year was more than four times the number predicting a drop. Corporate profits and consumer spending were also expected to increase across district states.

Finally, a majority of respondents predict higher inflation over the next 12 months; only 2 percent believe that inflation will fall.

Survey Results

Total (376 Responses)

How did your location perform during the last four quarters compared to the previous four quarters?

  Up Same Down Diffusion
Sales Revenue 40% 35% 25% 58
Profits 33% 34% 32% 50
Productivity 27% 63% 10% 58
Employment Level 20% 64% 16% 52
Labor Availablility 5% 70% 25% 40
Selling Prices 29% 61% 11% 59
Input Costs 50% 46% 4% 73
Space Occupied (square footage) 6% 87% 7% 49
Exports (sales to foreign clients) 4% 92% 4% 50
  Decrease 0% 1%-2% 3%-5% 6%-10% >10% Average
Wages Per Worker 2% 31% 20% 38% 4% 4% 2.5%
Benefits Per Worker 3% 47% 12% 20% 10% 8% 2.5%

How do you expect your location to perform during the next four quarters?

  Up Same Down Diffusion
Sales Revenue 48% 39% 13% 67
Profits 41% 41% 19% 61
Productivity 31% 63% 6% 62
Employment Level 21% 72% 7% 57
Labor Availablility 5% 76% 19% 43
Selling Prices 26% 68% 6% 60
Input Costs 42% 54% 3% 70
Space Occupied (square footage) 4% 91% 5% 50
Exports (sales to foreign clients) 2% 93% 5% 48
  Decrease 0% 1%-2% 3%-5% 6%-10% >10% Average
Wages Per Worker 3% 26% 30% 38% 2% 2% 2.3%
Benefits Per Worker 3% 44% 21% 19% 7% 6% 2.1%

What is your outlook on the following state economic indicators during the next four quarters?

  Up Same Down Diffusion
Employment 43% 48% 9% 67
Consumer Spending 36% 49% 15% 61
Inflation 56% 42% 2% 77
Corporate Profits 36% 49% 16% 60
Mergers and acquisitions 38% 56% 7% 65
* A number above 50 indicates expansion; a number below 50 indicates contraction.
The index is computed by taking the percentage of respondents that reported "up" and half the percentage of the respondents that reported "same."
Percentages may not add to 100 due to rounding

Business Poll Results [xlsx]

Joe Mahon
Director, Regional Outreach

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.