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Business services feel the impact of the pandemic

2020 Professional Services Survey

September 21, 2020

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Article Highlights

  • Business activity falls for most services firms over past year
  • Employment, wages flat to lower
  • Most don’t expect return to normal in next six months
Business services feel the impact of the pandemic

“New business has decreased dramatically due to the uncertainty with the pandemic,” said the owner of a marketing firm in North Dakota. “Revenues have decreased 25 percent to 30 percent due to COVID-19.” This experience was typical of a broad array of business services firms responding to a recent survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

Overall, the survey indicates that activity at most professional services firms decreased over the past year. And, unfortunately, most don’t expect growth to rebound for their firms or for the broader economy over the coming year.

These results reflect responses from 236 firms in accounting, engineering, administrative support, consulting, and other professional services across the Ninth District. The survey, conducted in July and August, asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the coming four quarters.

Although many firms may have seen growth in the latter part of 2019 and into 2020, the severe downturn after the onset of the pandemic and the response appears to have wiped away those gains. Chart 1 presents these survey results as a “diffusion index,” which indicates an increase or decrease, on average, over the preceding four quarters. Values above 50 indicate expansion; those below 50 indicate contraction.

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More than half of the firms reported decreased sales revenue over the past year, compared with about a quarter who saw increased sales. Businesses also indicated similar results for profits, and productivity fell on balance as well. Meanwhile, two-thirds of respondents indicated that they hadn’t changed employment levels, though a higher share reported having decreased employment than increased it.

Likewise, a solid majority reported that labor availability was unchanged from a year ago, in contrast to survey results in recent years in which most companies reported that it had become harder to find workers. While a majority of firms had increased wages, a third reported no change in pay, and nearly half said they hadn’t changed benefits. Alarmingly, 13 percent of firms had cut wages and/or benefits.

Looking forward, services providers are pessimistic about the coming year. More firms anticipate decreased sales revenue and profits over the next four quarters than expect growth. About half of respondents expect productivity to hold steady over the coming year, and two-thirds don’t plan to change employment.

Only 14 percent of the firms intend to raise prices for their services, and a slightly higher portion said they would likely cut prices; the remainder didn’t plan to change their prices. Similarly, a strong majority did not expect their input costs to rise.

A special question on this year’s survey asked firms how long they thought it would be before their business would go back to “normal operations.” Nearly half thought it would take longer than six months, and 18 percent did not think their business will go back to normal (Chart 2).

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Unsurprisingly, respondents had a tepid outlook for the broader economy as well. About half of respondents expected consumer spending and corporate profits to fall in their states over the next year. The overall employment outlook was closer to flat, though more respondents expected employment to fall than expected job growth. Nearly half of businesses surveyed thought inflation would increase.

2020 Professional Services Business Conditions Survey Results

Total Ninth Federal Reserve District

Total (236 Responses)

How did your location perform during the last four quarters compared to the previous four quarters?
  Up Same Down Diffusion Index*
Sales revenue 24% 22% 54% 35
Profits 22% 24% 53% 34
Productivity 18% 37% 45% 37
Employment level 9% 66% 24% 43
Labor availability 7% 70% 24% 42
Selling prices 10% 78% 13% 49
Input costs 26% 67% 7% 60
Space occupied (square footage) 3% 87% 10% 46
Exports (sales to foreign clients) 2% 88% 9% 46
How do you expect your location to perform during the next four quarters?
  Up Same Down Diffusion Index*
Sales revenue 27% 32% 41% 43
Profits 25% 30% 45% 40
Productivity 19% 51% 30% 45
Employment level 12% 66% 21% 46
Labor availability 13% 70% 18% 47
Selling prices 14% 70% 16% 49
Input costs 30% 63% 7% 62
Space occupied (square footage) 3% 85% 12% 45
Exports (sales to foreign clients) 2% 89% 9% 47
What is your outlook on the following state economic indicators during the next four quarters?
  Up Same Down Diffusion Index*
Employment 26% 37% 36% 45
Consumer spending 21% 28% 50% 35
Inflation 49% 45% 6% 72
Corporate profits 19% 30% 51% 34
Mergers and acquisitions 31% 44% 24% 54
Previous Four Quarters
  Decrease 0% 1%-2% 3%-5% 6%-10% >10%
Wages per worker 13% 32% 15% 27% 5% 8%
Benefits per worker 13% 47% 13% 16% 6% 6%
Next Four Quarters * 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.
  Decrease 0% 1%-2% 3%-5% 6%-10% >10%
Wages per worker 14% 29% 24% 26% 3% 4%
Benefits per worker 14% 47% 16% 16% 6% 2%
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.