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- Business conditions were generally stable; year-ahead outlook was positive
- Labor availability still a challenge but wage growth was moderate
- Firms not planning many changes in their office usage
Even though unemployment has ticked up and labor demand has cooled, Ninth District businesses are still concerned about labor availability. “Finding quality employees remains the number one issue,” reported a contact at a Montana architecture firm.
And yet, despite those challenges, the past year brought further growth to professional services firms in the Ninth District, according to an annual survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. Looking toward the coming year, these businesses generally anticipate growth in business activity at their firms and in the broader economy.
The survey results reflect responses from 298 firms in accounting, consulting, design, engineering, marketing, and other professional services across the Ninth District. The survey, conducted from May through July, asked respondents about their experience over the previous 12 months, rather than the calendar year, and their outlook for the coming 12 months.
The past year saw modest growth for professional services firms in the region as a whole. Figure 1 shows survey results as a “diffusion index,” which indicates an increase or decrease on average over the previous four quarters as well as expectations for the coming four quarters. Values above 50 indicate expansion, below 50 indicate contraction.
Firms reported sales growth over the previous year. Productivity and employment also increased slightly on balance, while profits fell.
But these summary numbers obscure some variability in survey results. For example, 43 percent of firms reported increased sales while 35 percent reported a decrease. Results for profits were roughly the inverse of that. By contrast, 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 office space they occupied was unchanged. Among those that were cutting space, the most-cited reasons were that rents were too expensive, work had permanently shifted to remote or hybrid, or staffing levels had been permanently reduced (see Figure 2).
Despite reported concerns over finding workers, the labor market appears to have eased slightly from last year’s survey. About one-third of businesses surveyed said that labor had become less available compared with 12 months ago, a notable decline from last year’s survey, where more than half reported tighter labor availability. Still, only 10 percent reported an increase in labor supply.
Increases in employee compensation were similar to last year’s survey. Wages rose about 4.5 percent on average, while benefit costs increased by less than 4 percent, according to respondents.
Turning to inflation, more than half of respondents indicated that they increased the prices they charge to clients over the past year. But nearly three-quarters reported an increase in their input costs, which helps explain weaker profits.
Interest rates were another cost of business that remained elevated. More than 40 percent of firms reported no changes to their business due to credit conditions. However, 20 percent of firms said they had decreased their capital spending because of tighter credit, and 12 percent said they decreased their hiring.
Even with somewhat tepid growth over the past year, services firms in the district were expecting a strong year ahead. Nearly twice as many businesses anticipated increased sales revenues over the next four quarters as those that expected declines, while expectations for profits improved modestly and were stable overall. Productivity and employment were also expected to increase on balance, though a large share of respondents expected no changes.
Firms expected inflationary pressures to continue: 60 percent expected to pay more for inputs while only 2 percent predicted reduced costs. Just over half anticipated no change to their retail prices, but 40 percent expected to increase prices further in the year ahead. Modest wage increases were projected over the coming year, with wages increasing by 3.5 percent and benefits rising by about 3 percent.
Looking outside their businesses, respondents had slightly pessimistic forecasts for general economic conditions in their respective states. Firms expected employment in their states to decrease slightly on balance over the next year, and outlooks for consumer spending and corporate profits were more negative. With respect to inflation, 62 percent of respondents predicted increases in their states over the next 12 months—a slight reduction from last year’ survey results—while only 10 percent believed that inflation would fall.
| Total (298 responses) | ||||||
|---|---|---|---|---|---|---|
| How did your location perform during the last four quarters compared with the prior four quarters? | Up | Same | Down | Diffusion index* | ||
| Sales revenue | 43% | 23% | 35% | 54 | ||
| Profits | 34% | 23% | 43% | 45 | ||
| Productivity | 24% | 52% | 23% | 51 | ||
| Employment level | 22% | 56% | 21% | 51 | ||
| Labor availability | 10% | 56% | 33% | 38 | ||
| Selling prices | 54% | 37% | 9% | 73 | ||
| Input costs | 74% | 24% | 1% | 86 | ||
| Space occupied (square footage) | 7% | 85% | 8% | 50 | ||
| Exports (sales to foreign clients) | 3% | 89% | 8% | 47 | ||
| How do you expect your location to perform during the next four quarters? | ||||||
| Sales revenue | 41% | 36% | 23% | 59 | ||
| Profits | 32% | 37% | 31% | 50 | ||
| Productivity | 24% | 63% | 13% | 56 | ||
| Employment level | 25% | 60% | 15% | 55 | ||
| Labor availability | 8% | 66% | 26% | 41 | ||
| Selling prices | 40% | 51% | 9% | 66 | ||
| Input costs | 60% | 38% | 2% | 79 | ||
| Space occupied (square footage) | 7% | 87% | 6% | 50 | ||
| Exports (sales to foreign clients) | 5% | 89% | 6% | 50 | ||
| What is your outlook on the following state economic indicators during the next four quarters? | ||||||
| Employment | 19% | 58% | 23% | 48 | ||
| Consumer spending | 15% | 40% | 45% | 35 | ||
| Inflation | 62% | 28% | 10% | 76 | ||
| Corporate profits | 21% | 36% | 43% | 39 | ||
| Mergers and acquisitions | 32% | 54% | 14% | 59 | ||
| Previous four quarters | Decrease | 0% | 1%–2% | 3%–5% | 6%–10% | >10% |
| Wages per worker | 6% | 10% | 7% | 45% | 21% | 11% |
| Benefits per worker | 4% | 29% | 9% | 29% | 17% | 12% |
| Next four quarters | ||||||
| Wages per worker | 5% | 16% | 15% | 46% | 11% | 6% |
| Benefits per worker | 3% | 32% | 15% | 32% | 12% | 7% |
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.
