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Businesses continue to struggle with high prices and interest rates

Revenue fell and hiring slowed for many firms amid ongoing price pressures and high interest rates, according to a January survey of businesses

February 22, 2024


Haley Chinander Writer/Analyst
survey check box image transposed over an image of small town main street
Jake MacDonald/Minneapolis Fed; Getty Images

Article Highlights

  • Revenue and profit declined for many firms
  • High prices and interest rates remain a major challenge
  • Labor demand weakened but many are still hiring
Businesses continue to struggle with high prices and interest rates

High prices and elevated interest rates have continued to put pressure on businesses, according to a recent survey by the Federal Reserve Bank of Minneapolis.

The January survey received 602 responses from business owners across the Ninth District. Companies reported both lower revenues and profits overall, and some noticed their customers reducing spending.

Amid heightened labor and operating costs, more businesses have also pulled back on hiring and a small but notable share have reduced staff levels.

Despite these challenges, over half of businesses were still hiring in some capacity, and near-term outlook for businesses was more positive than negative overall.

Revenues and profits decline as spending recedes

Changes to revenue leaned negative for many businesses in the Ninth District. A higher share of firms experienced revenue declines than those that experienced growth over the year (see Figure 1). Expectations for future revenue have tilted negative as well, with nearly 40 percent of respondents expecting declines and only 26 percent expecting revenue to increase.

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Business owners were similarly downbeat about profits. About 47 percent reported that profits had declined compared with the same period last year, and profits fell for over half of respondents in the most recent quarter.

Respondents reported that heightened costs were taking a bite out of profits, and many were concerned about falling customer demand. “Midwesterners have pulled back on spending. Our average transaction is significantly down from [the] same time last year,” observed the owner of a retail business in Sioux Falls, South Dakota.

A Twin Cities construction firm noted the change as well. “Consumers quite abruptly stopped spending discretionary income on larger home improvements.”

Businesses that depend on typical winter weather, especially those in the retail and accommodation sectors, were also hit hard by the lack of snow and tourists this season. “In addition to fewer customers, we will have to do more discounting of winter merchandise that didn’t sell,” commented the owner of an outdoor retail shop in Northern Minnesota.

With demand appearing to waver, firms continued to feel pressure from high costs even though wholesale and retail price pressures moderated. Price increases remained a top challenge for businesses, followed by higher interest rates (see Figure 2).

“When I reorder product, I regularly find that the wholesale price is greater than what I retailed the items for. I cannot keep up with price increases,” commented a South Dakota retailer.

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Interest rates were also reported as a major challenge for businesses. When asked about the impact of current rates, 63 percent of respondents said they have had a negative impact on their business. Businesses frequently mentioned that the rates prevent them from expanding or investing more, and that the added cost has been difficult to afford.

“We are a new business and our loans closed when the rates were at an all-time high … so that has increased our monthly expenses dramatically,” commented a business owner outside of Minot, North Dakota.

The owner of a Twin Cities tree service business mentioned that high rates prevent them from automating more of their work. “We need more equipment to replace the lack of employees; however, the rates are so high we can’t afford the loans.”

Hiring pulls back amid high labor costs

As costs remain high, labor demand has weakened among respondents. Fewer firms were hiring compared with last year’s survey, and a higher share had reduced their staff levels (see Figure 3).

“When sales and services are slow, I can’t afford to keep on help to hold the cement down,” commented the owner of a Twin Cities towing company.

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Despite the pullback, over half of businesses were still looking for workers, with a large share hiring to replace turnover. About 55 percent of firms reported that it was moderately to extremely difficult to fill these open positions—a relatively high number but down nearly 10 percent over the year.

Businesses also continued to raise pay to attract or retain workers, but overall wage increases moderated. Less than 20 percent reported raises over 5 percent compared with 30 percent last January. Most expected to continue raising wages between 1 and 5 percent in the next six months.

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For businesses that could afford larger wage increases, some noted improved labor availability. “We significantly raised wages [in] fall 2023 and saw an influx of higher quality candidates, lower turnover, and higher job satisfaction,” noted the owner of a preschool in Montana.

“We are paying over-market wages to attract and keep employees. It has helped the problem of not having enough or competent staff. It has been hard on our profitability,” replied a business owner in Watertown, South Dakota.

When asked about their future staffing levels, a majority of business owners said they expect staffing to stay flat over the next six months. “I hope to keep existing staff, which is higher than last year, but business is starting to slump,” commented an auto body shop owner in the Twin Cities.

Businesses optimistic but wary

In light of these challenges, many businesses had a positive outlook; 43 percent were optimistic about business over the next six months and roughly a quarter were neutral. Only 32 percent were pessimistic.

Sometimes this optimism is an active choice for business owners who are struggling. “We are trying not to be pessimistic, but we are worried for ourselves,” commented a motel owner in the Upper Peninsula of Michigan.

For other businesses, falling inflation and the pause in interest rates might hint at improving business conditions. The owner of a retail business in Fargo, North Dakota, said, “We are optimistic that as prices continue to stabilize and drop, we will see consumer confidence get stronger and spending to increase.”

The Federal Reserve Bank of Minneapolis survey of general business conditions was conducted from January 16 through February 6, 2024. The survey received 602 responses from business owners across the Federal Reserve’s Ninth District, which includes Minnesota, Montana, North Dakota, South Dakota, the Upper Peninsula of Michigan, and northwestern Wisconsin.

About 43 percent of responses came from Minnesota businesses, and 30 percent came from North Dakota and South Dakota. All states surveyed had at least 45 responses. Survey results were obtained using a convenience sample of businesses. 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.