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Services firms remain optimistic despite inflation challenges

2022 Professional Services Survey

June 27, 2022


Joe Mahon Director, Regional Outreach
Decorative Key
Jake MacDonald/Minneapolis Fed

Article Highlights

  • Business activity generally increased or held steady
  • Though labor availability and inflation were challenges, wage increases were modest overall and adoption of remote work was limited
  • Outlook for firms was steady, overall economic outlook less optimistic
Services firms remain optimistic despite inflation challenges

Along with ongoing workforce challenges, the rise in inflation has emerged as the primary concern for Ninth District businesses. “Inflation is a big negative for the local economy,” said a marketing researcher based in Michigan’s Upper Peninsula.

And yet, despite concerns about the economic impacts of higher inflation, the past year brought further growth to professional services firms in the Ninth District, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. These businesses generally anticipate steady business activity at their firms and in the broader economy over the coming year.

These results reflect responses from 333 firms in accounting, consulting, design, engineering, marketing, and other professional services across the Ninth District. The survey, conducted in May and June, asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the coming 12 months.

For the most part, the past year was a financial success for professional services firms in the region. Chart 1 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; below 50 indicate contraction.

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Nearly half of firms reported increased sales revenue over the past year, while 29 percent saw steady sales. Profits, productivity, and employment were roughly stable over the period, but this summary number obscures some details of the variability in survey results. Roughly similar proportions of respondents noted that profits had increased, held steady, or decreased. However, a majority reported that employment and productivity were unchanged, with the balance roughly split between those reporting increases and decreases.

A strong majority of respondents reported that the amount of space they occupy was flat. Firms were fairly mixed in their responses to a related special question on this year’s survey, in which they were asked about their plans for hybrid or remote work, with most respondents indicating they were only offering that option for some employees or for a limited time, or that they were on-site full time (see Chart 2).

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Turning to inflation, more than three-quarters of respondents reported an increase in their input costs, while slightly more than half reported that they raised the prices they charge to clients. In response to a separate question, most reported that credit conditions were a minor factor in hiring or capital spending decisions.

Nearly half of businesses surveyed said that labor had become less available, while only 3 percent reported an increase in labor supply. Even so, increases in employee compensation were only modestly higher than last year’s survey results. Wages rose slightly more than 4 percent on average, while benefits costs increased just under 3 percent, according to respondents.

Looking ahead, services companies were cautiously optimistic about the coming year. More firms anticipate increased revenues over the next four quarters than expect declines, while expectations for profits were more evenly divided. Productivity and employment were also expected to increase, on balance, though a majority of firms expect these indicators to stay level.

Most firms’ outlooks also call for inflationary pressures to continue; 74 percent of firms expect to pay more for inputs, while only 2 percent foresee reduced costs. Slightly less than half of firms intend to raise their prices, while only 6 percent expect to cut prices. Surprisingly, given higher inflation and poor labor availability, most anticipate relatively modest wage increases; over the next four quarters, firms expect wages to increase by an average of about 4 percent and benefits by slightly less than that.

Looking outside their businesses, respondents had somewhat tepid forecasts for general economic conditions. While respondents expect employment in their states to increase on balance over the next year, outlooks for consumer spending and corporate profits were negative. An overwhelming majority of respondents predict increased inflation in their states over the next 12 months, while only 1 percent believed that inflation would fall.

2022 Professional Services Business Conditions Survey Results

Total Ninth Federal Reserve District

Total (333 Responses)

How did your location perform during the last four quarters compared to the previous four quarters?
  Up Same Down Diffusion Index*
Sales revenue 48% 29% 23% 62
Profits 36% 31% 33% 52
Productivity 24% 55% 21% 51
Employment level 19% 61% 20% 50
Labor availability 3% 48% 48% 27
Selling prices 52% 45% 3% 75
Input costs 77% 21% 2% 88
Space occupied (square footage) 10% 85% 4% 53
Exports (sales to foreign clients) 4% 90% 6% 49
How do you expect your location to perform during the next four quarters?
  Up Same Down Diffusion Index*
Sales revenue 38% 44% 18% 60
Profits 29% 44% 18% 60
Productivity 22% 64% 13% 54
Employment level 21% 67% 12% 55
Labor availability 5% 53% 42% 32
Selling prices 49% 45% 6% 72
Input costs 74% 24% 2% 86
Space occupied (square footage) 8% 87% 6% 51
Exports (sales to foreign clients) 5% 88% 7% 49
What is your outlook on the following state economic indicators during the next four quarters?
  Up Same Down Diffusion Index*
Employment 25% 57% 18% 54
Consumer spending 19% 33% 48% 54
Inflation 89% 11% 1% 94
Corporate profits 21% 36% 43% 39
Mergers and acquisitions 27% 54% 19% 54
Previous Four Quarters
  Decrease 0% 1%-2% 3%-5% 6%-10% >10%
Wages per worker 5% 20% 5% 36% 22% 12%
Benefits per worker 5% 42% 7% 24% 11% 10%
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 3% 23% 11% 37% 21% 5%
Benefits per worker 3% 41% 10% 28% 13% 5%
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.