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Businesses cautiously optimistic despite high costs and continued labor challenges

A January survey of businesses reveals lower profits as firms face the pressure of high prices and the rising cost of labor

February 27, 2023


Haley Chinander Writer/Analyst
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Jake MacDonald/Minneapolis Fed; Getty Images

Article Highlights

  • Profits decline as businesses struggle with high input costs
  • Hiring remains relatively strong, but staffing challenges persist
  • Outlook is modestly optimistic despite current challenges
Businesses cautiously optimistic despite high costs and continued labor challenges

A year of high prices and rising interest rates has strained profits for many businesses across the Ninth District, according to a recent survey by the Federal Reserve Bank of Minneapolis.

The survey closed in early February, and 535 responding companies reported that hiring remains relatively strong, but workers are still generally hard to find and afford.

However, some persistent challenges appear to be easing; for example, supply chains have improved for many firms. And despite the many challenges in today’s economy, the outlook from businesses was moderately optimistic.

Lower revenues for many, and even lower profits

Revenues for many firms leaned negative in the most recent quarter (see Figure 1). However, revenue expectations for the coming quarter were modestly positive, a sign of optimism that showed up in several places in the survey.

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Profit trends were even more negative, with a higher share of respondents reporting that profits had fallen (Figure 2). And despite expectations of higher revenue in the coming quarter, a modestly higher share of companies expects decreased profits over this period compared with those expecting an increase (38 percent and 28 percent, respectively).

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Higher input costs were repeatedly cited by firms as a main reason for declining profits, and as one of the top challenges facing businesses (see Figure 3). For some firms, higher prices have impacted sales by dampening customer demand.

“Costs are much higher while guests are tightening their purse strings and not as willing to accept price increases as easily as they did in 2021,” commented a Wisconsin business owner in the accommodation and food services sector.

Even some with higher sales are predicting red bottom lines. “There may be a moderate increase” in sales, commented the owner of a South Dakota services firm. “However, the prices of supplies will eat any increased revenue and I’ll probably make less.”

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Roughly 65 percent of firms said wholesale prices from vendors were up 5 percent or more over the year, and almost half of this group said these prices rose by more than 10 percent. In contrast, 45 percent of respondents noted that final prices to customers rose by 5 percent or more.

A hotel and restaurant owner in Michigan’s Upper Peninsula described the difficulty of keeping up with rising prices, “I would need to reprint my menus literally daily to keep up with food price changes. Overnight rooms we can change [the prices of] every day, but based on my market, I can’t. Travel has declined sharply.”

Most businesses reported that current interest rates are also negatively impacting their business. About 60 percent noted that interest rates are having a modest to significant impact on their businesses, hitting the construction, manufacturing, and finance sectors the hardest.

“People are not building new homes or doing any sort of remodeling that involves financing,” said the owner of a construction firm in Greater Minnesota.

“The cost of borrowing is higher than last year and the amount we need to borrow is higher,” wrote another Minnesota construction firm in the metro area.

Some silver linings as labor challenges persist

There is some positive news, however. Supply chain disruptions, a major challenge for businesses over the last few years, appear to be slowly easing. A third of respondents reported that supply chains have improved, and only about a quarter found them to be worsening.

Hiring demand also remains strong across the Ninth District. A majority of businesses reported that they want to hire new employees in some capacity, and only 5 percent of businesses said they reduced staff in recent months.

However, many firms have become highly discouraged by an enduringly tight labor market. “I was trying to hire but gave up and adjusted my hours to be open less,” commented one North Dakota business owner.

Nearly all businesses that were hiring reported some degree of difficulty finding workers to fill open positions: 41 percent of firms noted hiring is extremely difficult and an additional 36 percent reported it is moderately difficult (Figure 4).

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Some business owners cited a lack of available workers with the right skills as a reason for their labor difficulties, a common challenge over the last couple of years.

However, many firms pointed to rising labor costs as a bigger challenge for finding and retaining staff, rather than a lack of applicants.

One South Dakota business owner explained that “it’s not necessarily difficult to find good people looking to work for our organization, it’s just considerably more expensive to get prospective employees to make a [job] change.”

Firms have raised wages widely to attract and retain workers. Nearly 36 percent have raised wages more than 5 percent over the year, and another 25 percent reported wage increases between 3 and 5 percent.

“It is extremely difficult to find workers willing to work for what we paid 2–3 years ago,” wrote the owner of a North Dakota food services business. Having raised wages by 28 percent over this period, “we are at least competitive enough to be able to find workers. But that has come with a significant cost.”

The added costs to attract and keep staff have put additional strains on many businesses, especially small firms. A higher share of firms with 10 or fewer of employees reported that the wages they were offering remained flat over the year compared with larger businesses, who almost unanimously increased wages to some degree.

“I cannot afford to compete with larger businesses for the hours and benefits,” the owner of a small professional services firm in the Twin Cities explained. “Medical will continue to be an impossible benefit to offer—which results in being able to only recruit people with health insurance through other means.”

The owner of a Twin Cities consulting business also shared, “Being a small startup, we cannot afford to attract new employees because we are unable to pay the prevailing wages they are demanding and benefits to retain them.”

The search and scramble for labor is itself adding up for some companies. A business in Minot, North Dakota, said it saw improved hiring after two wage increases, “but it is difficult to retain competent staff, even with higher wages. … Our administrative costs have increased significantly because of the need to post jobs, repost jobs, interview, train and retrain staff.”

Optimism among businesses on the rise

Despite the recent challenges, the outlook of firms was modestly positive overall; about 45 percent reported that they are optimistic about the next six months, compared with 29 percent who are pessimistic.

This optimism marks a change in attitude. Since 2022, the outlook sentiment has been consistently (if modestly) more pessimistic. However, the optimism expressed by some respondents was clouded by caution given the numerous unexpected shocks they’ve faced since 2020.

“I’d be much wealthier if I close shop and went back to working for someone else. We survived the worst of COVID-19 and the civil unrest. But it’s exhausting,” commented a Twin Cities business owner. “I’m trying to stay positive that things will improve, but I think these next 6–9 months will determine our next steps.”

For others, positivity is the only option now after experiencing the lows of the last year. The owner of an Upper Peninsula firm in the logging industry put it simply: “I am personally optimistic, because I feel it cannot get much worse.”

The Federal Reserve Bank of Minneapolis survey of general business conditions was conducted January 17 through February 8, 2023. We received 535 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.

About 60 percent of responses came from South Dakota, North Dakota, and Greater Minnesota businesses. Every other state or region surveyed had at least 35 responses. The responses do not come from a scientifically representative sample. Because of these factors, readers should exercise appropriate caution interpreting results.

Haley Chinander

Haley Chinander is an analyst and writer at the Federal Reserve Bank of Minneapolis. In her role, Haley tracks and reports on the Ninth District economy with a focus on labor markets and business conditions. Follow her on Twitter @haleychinander.