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.

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).

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.