High interest rates remain a top challenge for businesses as demand cools

Concerns about cooling demand have added pressure to businesses in a high-cost environment, according to a recent Federal Reserve Bank of Minneapolis survey.

The July survey received 587 responses from a wide range of business owners across the Federal Reserve’s Ninth District. Companies reported lower revenues and profits, with high interest rates and elevated prices taking the blame.

Often citing labor costs, businesses continued to pull back on hiring, and many expected their staffing levels to remain flat in the near future.

Despite these challenges, labor availability had somewhat improved, and businesses reported a more positive than negative outlook overall.

High costs bite into declining revenue

Changes to revenue were largely negative for businesses in the Ninth District. Roughly 48 percent reported that recent quarterly revenue had declined compared with the same period a year ago; only 28 percent saw growth.

Even more firms experienced a drop in profits. Over half of business owners saw profits decline compared with the same period last year, and many continued to expect lower profits in the near term (see Figure 1).

Amid these declines, business owners pointed to elevated prices and high interest rates as their top challenges (see Figure 2). Many firms observed that although wholesale and retail price increases had moderated, customers were becoming price resistant and choosier with their purchases.

“There is only so much a Midwestern consumer is going to spend on an item,” explained a Sioux Falls retail owner. “We have to pay more to get the items, but we can’t recoup all of that with a price hike because we would lose even more sales.”

Firms also reported sustained challenges from high interest rates. Nearly 64 percent said current rates have had a negative impact, roughly the same share as last July.

Some businesses reported that interest rates were directly affecting their ability to grow or invest in their businesses. “Getting a loan these days costs far more than it’s worth,” a Minnesota tree care company owner wrote. “We’d rather rent equipment than buy it due to the prices.”

Others saw interest rates also hurting customer demand. “People seem to be in a wait-and-see mode,” observed a South Dakota business owner in the financial activities sector. “They’re sitting on their hands and not making big financial decisions.”

(Quality) help wanted

As demand reportedly cooled and costs remained high, hiring continued to pull back. The share of firms not hiring rose compared with last year, as did the share that reduced staff, although from low levels (see Figure 3).

“We have [to] cut costs somewhere, and staffing is the low-hanging fruit,” a Montana finance business owner wrote.

While over half of respondents were still hiring in some capacity, most reported hiring to replace turnover rather than adding staff. There was also a moderate decline in the share hiring additional full-time workers. Staffing levels were largely flat over the last six months, and most businesses expected it to stay that way.

“We had planned to add staff, but the downturn in business has made me postpone that,” a North Dakota business owner in the finance and real estate industry mentioned.

Those trying to hire reported that it was still a struggle to fill open positions, although the difficulty level had moderated compared with results from last year. Roughly 26 percent of business owners said hiring was extremely difficult, down from 32 percent last July. “Labor issues seem to be better in general, still difficult for certain positions,” a South Dakota retailer observed.

Business owners noted that the main reason for hiring difficulties had changed. Concerns regarding the number of applicants had diminished over the year, whereas concerns about the quality of applicants increased (see Figure 4).

“We don’t have trouble filling the lower skill-level positions; however, the higher-level skilled positions are hard to fill,” the owner of a Minnesota construction company wrote.

Business owners were also concerned about applicants’ wage demands. Many had continued to raise wages but to a lesser extent than prior years; roughly 18 percent of businesses increased wages by 5 percent over the year compared with 30 percent of businesses a year ago.

Some explained that continuing to increase starting wages was becoming harder to afford. “Limited availability of skilled employees … [and] those that are available are asking for a wage that is higher than what can be supported,” the owner of a Minnesota professional services firm wrote.

Others mentioned they felt added pressure to continue raising wages to retain employees. “Cost of living has increased so much that we are having to increase wages to follow or take the chance of losing employees,” a North Dakota construction owner commented.

Sustained optimism amid uncertainty

Amid these challenges, many businesses remained positive in their outlook; 40 percent were optimistic about business over the next six months, 29 percent were neutral, and 31 percent were pessimistic.

“I’m not sure where the breaking point is with consumer spending vs. my costs,” wrote the Sioux Falls retail business owner. “It’s a tough time to keep a small business going. It’s quite suffocating as we get hit in so many ways,” a Greater Minnesota accommodation business owner added.

Despite the concerns, business owners were often confident that they’d be able to push through the current challenges. Only 1 percent of respondents worried about going out of business.

“It’s been hard, but we won’t give up,” commented a business owner in Rapid City. “We continue to move forward no matter what challenges we face.”

The Federal Reserve Bank of Minneapolis survey of general business conditions was conducted from July 16 through July 29, 2024. The survey received 587 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 38 percent of responses came from Minnesota businesses, 25 percent from South Dakota, 12 percent from North Dakota, 11 percent from northwestern Wisconsin, 11 percent from the Upper Peninsula of Michigan, and 3 percent from Montana businesses. Survey results were obtained using a convenience sample of businesses. Because of these factors, readers should exercise appropriate caution interpreting results.