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Business brisk at professional services firms; more growth expected

July 9, 2018

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Business brisk at professional services firms; more growth expected

“Our economy is booming,” said a marketing firm in Michigan’s Upper Peninsula. “We are at full employment in our area.” This comment reflected the sentiments of consultants, engineers, staffing agents, advertisers and other professional services firms in the Ninth Federal Reserve District, in a mid-year survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

Overall, the results indicated that business services firms grew over the past 12 months, and expect growth to continue both at their firms and in the broader economy. However, labor availability remained a challenge and input costs crept up at many firms.

More than 350 services firms, selected at random, responded to the survey, conducted in May and June. They were asked about their experience over the most recent four quarters and their expectations for the coming four quarters.

Responses indicate that the period was a financial success for most 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, those below 50 indicate contraction.

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More firms than not reported that their sales or profits increased or held steady over the previous four quarters. Employment and productivity also expanded over the period, although respondents noted an increase in input costs and the prices they charge for services. In response to a separate question, a strong majority reported that credit conditions were not a major factor in hiring or capital spending decisions.

However, nearly a third said that labor had become less available, while only 8 percent reported more labor availability. Wages rose 2.8 percent, on average, and benefits per worker increased 2.4 percent, according to respondents.

A special question asked about impact of recent changes in federal tax legislation on business. The large majority of respondents reported no changes in employment (82 percent), prices charged (81 percent), capital expenditure (71 percent), wages (69 percent), customer demand (66 percent) and profits (61 percent).

Looking ahead, services companies are optimistic about the coming year. More firms anticipate increased sales revenue and profits over the next four quarters than expect declines. Productivity and employment are also expected to increase.

More than a quarter of firms intend to increase prices, while only 4 percent expect to cut prices. Planned price hikes may be partly in response to higher costs; 45 percent of firms expect to pay more for inputs, while only 2 percent foresee reduced costs. Most anticipate moderate wage increases. Over the next four quarters, firms expect wages per worker to increase by an average of 2.5 percent and benefits by 2.1 percent.

Asked about their outlooks for the broader economy, the number of professional services firms expecting employment in their states to increase over the next year was six times the number predicting a drop. Corporate profits and consumer spending were also expected to increase across district states.

Finally, nearly two-thirds of respondents predict higher inflation over the next 12 months; only 2 percent believe that inflation will fall.

Survey Results

Total (353 Responses)

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

  Up Same Down Diffusion
Index*
Sales Revenue 50% 30% 20% 65
Profits 48% 27% 25% 62
Productivity 37% 50% 13% 62
Employment Level 23% 62% 15% 54
Labor Availablility 7% 61% 32% 38
Selling Prices 29% 68% 4% 63
Input Costs 53% 45% 2% 76
Space Occupied (square footage) 7% 88% 5% 51
Exports (sales to foreign clients) 3% 92% 5% 49
  Decrease 0% 1%-2% 3%-5% 6%-10% >10% Average
Wages Per Worker 3% 23% 24% 39% 7% 3% 2.8%
Benefits Per Worker 3% 43% 17% 24% 7% 7% 2.4%

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

  Up Same Down Diffusion
Index*
Sales Revenue 48% 40% 12% 68
Profits 45% 40% 15% 65
Productivity 36% 58% 6% 65
Employment Level 27% 67% 6% 61
Labor Availablility 6% 67% 27% 39
Selling Prices 29% 67% 4% 62
Input Costs 45% 53% 2% 72
Space Occupied (square footage) 11% 86% 3% 54
Exports (sales to foreign clients) 5% 91% 4% 51
  Decrease 0% 1%-2% 3%-5% 6%-10% >10% Average
Wages Per Worker 2% 24% 28% 40% 4% 2% 2.5%
Benefits Per Worker 2% 42% 21% 25% 7% 3% 2.1%

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

  Up Same Down Diffusion
Index*
Employment 42% 51% 7% 68
Consumer Spending 47% 45% 7% 70
Inflation 64% 35% 2% 81
Corporate Profits 51% 38% 11% 70
Mergers and acquisitions 47% 50% 3% 72
Notes
* 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

Methodology: A stratified random sample of 2,300 businesses was drawn from a population of approximately 20,000 Ninth District professional business services firms (most firms in NAICS code 541). 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 5 percent with fewer than 5 employees.

A postcard survey was mailed to each of the selected businesses. The mailing was sent in mid-May, and a second mailing was sent in early-June to businesses that had not respond to the first mailing. A cutoff for survey responses was June 19. A total of 353 usable surveys were received, for a response rate of 15.3 percent.

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 firms in Montana, North and South Dakota, Ninth District counties in western Wisconsin and the Upper Peninsula of Michigan.

Business Poll Results [xlsx]

photo of Joe Mahon
Joe Mahon
Director, Regional Outreach
Joe Mahon is a regional outreach director at the Federal Reserve Bank of Minneapolis. Prior to that, he served as a regional economist and as a staff writer and analyst for Minneapolis Fed publications the Region and fedgazette. Mahon's primary responsibilities involve tracking several sectors of the Ninth District economy—an area that covers Minnesota, North and South Dakota, Montana and portions of Wisconsin and Michigan—for the Fed. Sectors he follows closely include agriculture, manufacturing, energy and mining. He holds degrees in economics and journalism from the University of Minnesota.