Firms less optimistic as rising prices and continued labor shortages strain business

Businesses have been dealing with a litany of challenges during the pandemic, and the fatigue of fighting those challenges appears to be taking its toll.

In a July survey by the Minneapolis Fed, businesses reported lower profits and an outlook that has soured a bit from the constant battle with higher prices, labor shortages, and other challenges.

At the same time, some indicators—like hiring demand—remain strong, signaling that businesses continue to show some resiliency in the face of these challenges.

Revenue changes mixed, profits down

Changes in revenue were mixed among Ninth District businesses. The share of firms experiencing growth was countered by a similar share of those seeing a decline in revenue. A notable number saw their revenues remain mostly flat (Figure 1).

The outlook for future revenue also varied, although a slightly higher share of firms reported expectations of higher revenue over the next quarter.

Profits told a gloomier story. A noticeably higher share of respondents reported that their profits have declined compared to those who said they increased or remained the same. Many firms also expected profits to decline or stay flat in the next three months (Figure 2).

Amid shrinking profits, businesses frequently reported that labor availability, rising prices, and supply chain problems were the most significant challenges facing operating capacity and productivity (Figure 3).

Firms have regularly cited these three challenges over the last year, but labor availability and rising input prices now make up a much higher share of responses than they have in past surveys. Meanwhile, the share of businesses reporting supply chain disruptions as a challenge has eased modestly since the January survey.

Increased costs have been hitting most businesses hard in the district. Nearly all respondents noted that their nonlabor input prices have increased since last year, and over 40 percent said that these prices have increased more than 10 percent.

These increased costs have also led to most businesses raising their final prices to customers, with a majority increasing their retail prices nearly 10 percent compared to last year.

Given the added strain, business owners commented that these rising input prices were hurting their profits the most.

“Revenues have increased significantly, but input costs are also increasing, so it does not mean more profit, just significantly more risk,” commented the owner of a North Dakota agriculture firm.

In addition to input prices, some firms have also started to feel the effects of rising interest rates. About 36 percent of businesses noted a moderate to extreme negative impact from rising rates. However, a plurality of firms reported that they are not sure yet how rising rates will affect their business.

Hiring mostly undeterred by current challenges

Despite some reports of hiring slowing down nationwide, a significant majority of businesses reported they were still hiring in some capacity, and many were trying to add more full-time workers (Figure 4).

Most of this labor demand has been driven by larger firms. Hiring among businesses with over 50 employees was nearly universal, and 90 percent of firms with 11 to 50 employees indicated they were also hiring in some capacity. Less than 30 percent of employers have stopped hiring, most of which were smaller businesses with one to 10 employees. Only a few respondents indicated they were cutting staff.

This strong labor demand may not be letting up anytime soon. A majority of respondents indicated that they expect their staffing levels to either increase or stay the same in the next six months, compared to just 15 percent who expect staffing levels to be lower.

Even some firms that are no longer hiring indicated they were anxious about losing their existing workers.

“We are not hiring, but we are holding on to our employees,” commented the owner of a construction firm in the Twin Cities. “If we wanted to hire qualified skilled labor, there really isn't anyone available in our trades.”

Wages rise amid labor availability strains

Finding workers for open positions continued to be a major strain on businesses in the district. A majority of firms reported that labor availability was a bigger challenge to their productivity than supply chain disruptions, higher financing costs, and even price increases (although by a very slim margin).

When asked about their availability to find and hire necessary labor, over 83 percent of firms reported that it was difficult in some capacity, with about half of those respondents noting that hiring was extremely difficult. Only 3 percent reported no difficulty with hiring.

To attract and retain workers, companies are raising wages. Nearly 55 percent indicated that average wages have increased 3 percent or more over the last year (Figure 5). Wage expectations have also shifted, with over 50 percent of firms expecting to raise wages 3 percent or higher in the future compared to just 40 percent in January.

Firms often cited increased competition with other businesses and inflationary pressures on workers as the reason for raising wages, especially as more businesses experienced turnover among their existing staff.

“Increases have been made to stay competitive in the labor market,” noted a nonprofit organization in South Dakota. “We have lost a high volume of staff due to lower pay … [so] we have budgeted the coming fiscal year at a high percentage increase.”

Companies were also trying other strategies to attract and retain labor. Many firms reported that they were offering flexible scheduling and increasing remote-work options to help fill their labor needs, although some indicated they were reluctant to do so.

“We are way more flexible on scheduling than we like to be, but it does improve worker satisfaction and retention,” commented a retail store owner in Minot, North Dakota.

Uncertainty clouds business outlook

In the wake of rising prices, higher wages, and staffing challenges, more firms have reported a dimmer outlook on future business. About 36 percent of businesses in the current survey noted that they have a pessimistic outlook for the next six months compared with just 27 percent in the January survey.

“If we are lucky, we will be okay,” commented another Twin Cities business owner. “[Our] biggest concern is inflation, the ability to maintain an appropriate profit margin in spite of the inflated costs of materials, and the lack of qualified labor.”

The Federal Reserve Bank of Minneapolis survey of general business conditions was conducted July 7 through August 1, 2022. We received 444 responses from across the Federal Reserve’s Ninth District, which includes Minnesota, Montana, North Dakota, South Dakota, the Upper Peninsula of Michigan, and northwestern Wisconsin.

A little over one-fourth of responses came from firms based in Minneapolis–St. Paul. Every other region or state had at least 24 responses. Because of these factors, readers should exercise appropriate caution interpreting results.