“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.

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).

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.