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As pandemic fears fade, optimism blooms for Ninth District businesses

But labor costs and supply chain disruptions threaten growth

May 7, 2021


Tu-Uyen Tran Senior Writer
Decorative Key
Jake MacDonald/Minneapolis Fed

Article Highlights

  • Some hard-hit sectors, such as entertainment and recreation, continue to struggle
  • Employers raising wages to attract workers who earn more from higher unemployment benefits
  • Higher cost of labor, supplies forcing businesses to raise prices for customers
As pandemic fears fade, optimism blooms for Ninth District businesses

For the first time since the beginning of the pandemic, a majority of respondents to the Minneapolis Fed’s quarterly general business survey reported optimism, even if many expected a rough road to full recovery.

“Once people could get out and shop—they SHOPPED!” a Twin Cities home furnishing retailer gushed in the April survey. “They want to get out of their houses—and they spend their money.”

Her store’s monthly revenue has been 15 percent higher year over year, she said, even with shorter hours.

But, for her and the 65 percent of respondents who were optimistic, the euphoria is tempered by challenges they face from the disruption of the pandemic and policy responses to it. Outside of customer demand, hiring has become the biggest challenge for all respondents, followed closely by purchasing enough supplies, which are often unavailable or more expensive.

“There will be plenty of business, but we may not have the employees to take advantage of the business increase,” a South Dakota fast food franchisee said.

For 20 percent of respondents, the light at the end of the tunnel is still not in sight. Many are in the entertainment and recreation sector (Chart 1)—gyms and firms that produce live events—which are hindered by social distancing requirements still in place in some states.

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The survey received 822 responses from businesses, nonprofit groups, and some local government organizations in the Federal Reserve’s Ninth District, which includes Minnesota, Montana, North and South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan.

While these surveys are nonscientific and it’s difficult to make direct comparisons, the drastic change in sentiment from a few quarters ago is undeniable. In the October and January surveys, only around 40 percent of respondents were optimistic.

Revenues return to pre-pandemic times

For most respondents, the first quarter of the year suggests that they’re very close if not at pre-pandemic levels despite vaccinations only just becoming available to the general public. A little more than half reported revenues that were the same or better than in the same quarter a year ago.

"With more sales and production needs, we have brought back all employees to a full 40-hour work week again and are trying to hire."

“The reopening of businesses and their willingness … to invest in their signage has helped drive our sales numbers back up again,” said a respondent representing a North Dakota manufacturer, which reported first-quarter revenues up 5 percent to 15 percent year over year. “With more sales and production needs, we have brought back all employees to a full 40-hour work week again and are trying to hire more people.”

A few business sectors lagged behind (Chart 2), notably entertainment and recreation, accommodations and food service, and transportation and logistics; the latter includes buses and taxis. All were and still are severely hurt by social distancing, because either the government required it or customers feared being infected with COVID-19.

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“Leisure travel is slowly recovering. Business travel is still way down from pre-COVID periods,” said the owner of an airport shuttle service in central Minnesota. “Our wedding and convention group travel has not picked up yet.”

Also struggling are very small businesses and minority-owned, women-owned, veteran-owned, and Twin Cities businesses. These all have a higher-than-average percentage of respondents who reported first-quarter revenues being down more than 25 percent year over year. The contrast is most notable when responses are broken down by size of employers. For example, 40 percent of sole proprietors and 29 percent of businesses employing 10 or fewer saw revenue decline by more than a quarter. This was true of only 4 percent of businesses employing more than 250. In addition to having fewer resources to weather pandemic disruptions, a disproportionate number of very small businesses are in vulnerable sectors such as entertainment and recreation.

Looking ahead to the second quarter, 70 percent of respondents said they expect better revenues than the same quarter a year ago, not unusual given the economic disruption that arrived with the emergency measures enacted in response to the pandemic in March 2021. But 25 percent said they expect revenue to actually be worse. A few had opportunities during the pandemic that have since faded; for example, a Montana manufacturer said a COVID-19-related contract kept them busy last year but isn’t available this year. Others said important clients who hung on at the start of the pandemic have since gone out of business or have smaller budgets. Still others said the higher costs of labor and supplies have reduced net revenue.

Yet, even among those who expect a worse second quarter, the optimists still outnumbered the pessimists.

The owner of a home furnishing store in southeastern Minnesota, who expected second-quarter revenue to fall 5 percent to 15 percent year over year, said she’s still hoping for a strong holiday season as more customers get vaccinated.

Growth slowed by hiring difficulties

But even as many respondents look forward to recovery, they’re running into several obstacles that threaten growth.

“We’re anticipating a strong summer for the lodging industry,” said the operator of a hotel in the Upper Peninsula. “Our problem will be, can we clean the rooms and sell them. We can’t find housekeeping staff.”

"We’re anticipating a strong summer for the lodging industry. Our problem will be, can we clean the rooms and sell them. We can’t find housekeeping staff."

Asked to choose two of the biggest challenges aside from customer demand, hiring was the top choice, followed by supply chain disruptions; fewer respondents chose other options, such as government restrictions and COVID-19-related workplace practices. Twin Cities respondents, though, were more concerned about restrictions.

Nine of 10 respondents who were looking for new hires said hiring was difficult, and this was the case in all but two sectors; eight of 10 reported difficulty in entertainment and recreation and in professional, technical, and scientific services. Seven of 10 in accommodations and food service and in transportation and logistics said hiring was “extremely” difficult (Chart 3).

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The top complaint regarding labor in nearly every sector was the supplemental unemployment benefits the federal government paid throughout much of the pandemic on top of regular benefits—during the survey period, it was a flat $300 a week—which many respondents said made it possible for workers to make as much while unemployed as they would employed.

“The extra (unemployment) payment is making it extremely difficult, especially at the lower-wage service industry sectors (e.g., restaurant, hotel, delivery, warehouse),” a local chamber of commerce in Montana said.

Not all employers blame the extra unemployment benefits. Some said it’s been hard to find workers since before the pandemic because of their rural location or because the workers they need are specialized and not enough are being trained.

“Experienced candidates in the banking industry are extremely hard to find,” a North Dakota banker reported. “[The] industry is oversaturated, and talent is spread thin.”

Supplies still disrupted

Besides higher wages, the price of other inputs such as material and fuel has also increased. Supply chains, disrupted by the pandemic, continue to bedevil Ninth District respondents with limited quantities and shipment delays, all of which threaten growth.

The operator of a construction equipment rental firm in the Twin Cities said equipment needed may not be delivered until after the construction season is over because manufacturers are having their own problems with labor and supplies. “This is going to cost us with lack of sales.”

Not all industries were hit equally. Construction and manufacturing had the worst of it, with around half of respondents reporting price increases exceeding 10 percent for nonlabor inputs. That’s double the average for all respondents.

Sectors that rely less on material inputs, such as professional, technical, and scientific services, were less likely to report higher prices.

Wages and prices rising

As a consequence of labor and supply challenges, workers are benefiting from rising wages while customers must pay higher prices.

Among those who are hiring now or plan to in the next three months, 58 percent have already raised wages compared with a year ago in April, and 77 percent plan to raise wages between April and the end of the year (Chart 4). Even among those not adding to their workforce, a substantial number have raised wages or plan to just keep up.

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“We are in a hiring crisis, which has raised our costs to find candidates and [has] raised pay rates significantly to be competitive, which is lowering profits,” a child care provider in central Minnesota said. She reported offering annual pay raises six months early and increasing pay 8 percent to 10 percent, much more than the usual 2 percent to 3 percent, and some of that will translate to higher rates for parents.

"We are in a hiring crisis, which has raised our costs to find candidates and [has] raised pay rates significantly to be competitive, which is lowering profits."

More often than not, higher costs for labor and nonlabor inputs meant higher prices for customers. Overall, 63 percent of respondents reported raising prices, though most said price hikes were less than 10 percent. Another 30 percent said they held prices for customers steady. Of the two, labor costs seemed to be less of a factor in price increases. When wages increased but the cost of nonlabor inputs did not, a vast majority of respondents kept prices flat for their customers; this was not the case when the opposite happened.

Respondents described being caught between needing to earn a profit and needing to retain customers.

“We will need to raise prices to support the higher supply costs and higher labor costs. We are reluctant to do so until customers become more plentiful,” said the operator of a health club in Greater Minnesota. The pandemic, she said, had changed her customers’ habits, and it’ll be a “learning experience” to bring those old habits back as concerns about COVID-19 begin to fade.

Tu-Uyen Tran
Senior Writer

Tu-Uyen Tran is the senior writer in the Minneapolis Fed’s Public Affairs department. He specializes in deeply reported, data-driven articles. Before joining the Bank in 2018, Tu-Uyen was an editor and reporter in Fargo, Grand Forks, and Seattle.