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- Services firms saw stability and mild growth over past year; year-ahead outlook is mildly positive
- High input costs weighed on profits and firms expect further inflation
- Labor supply remains tight even as demand has eased
As in other industries, for businesses in the services sector, the volatility of trade policy is a big concern. “Uncertainty about tariffs is very disruptive,” commented a respondent for a Minnesota services firm.
But amid all this unpredictability, services firms in the Ninth District still reported a somewhat positive outlook for their businesses over the coming year, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. Over the past year, firms saw mild growth in sales, productivity, and employment, and are expecting more in the year to come.
These results reflect responses from nearly 300 firms in advertising, administrative support, engineering, legal, and other professional services across the Ninth District. The survey, conducted from May to July, asked respondents about their experience over the previous four quarters, rather than the calendar year, and their outlook for the coming four quarters.
Respondents generally saw stable activity or slight growth over the past year. Figure 1 presents survey results as a diffusion index, which indicates an increase or decrease. Values above 50 indicate expansion and below 50 indicate contraction.
Demand grew on balance, as revenue increased over the past year for 40 percent of firms surveyed, compared with 30 percent who saw sales fall. However, profits declined. This decrease was likely due to a surge in input costs: Although productivity increased on balance, this may have been offset by greater decline in margins.
With respect to inflation, nearly half of respondents indicated that they increased the prices they charge to clients over the past year. Meanwhile, more than two-thirds reported an increase in their input costs.
Employment increased slightly overall, though most (61 percent) of respondents reported no change in their staffing levels. The supply of workers remained tight, as 23 percent reported worker availability decreased. But compared with recent years, the share that reported decreased availability was down, which is a sign of mild easing.
Likewise, respondents indicated that growth in compensation slowed from the last few years. Wages increased 3.7 percent on average over the previous 12 months (compared with 4.5 percent from last year’s survey), while benefits costs increased by just under 4 percent.
A new question on this year’s survey delved deeper into worker availability, asking firms how labor market indicators have changed since the beginning of 2025. Conditions eased on the demand side: The number of open positions increased on balance but was unchanged for nearly 3 in 5 respondents (see Figure 2).
But labor supply conditions remained tight. For example, 41 percent of firms reported that the number of qualified applicants for open positions decreased this year. Meanwhile, 60 percent noted that applicant wage demands increased, and 40 percent said demands for benefits and remote work increased as well.
Perhaps as a result, nearly two-thirds of respondents said they’ve increased automation or artificial intelligence. “AI has improved efficiencies and may mean fewer hires in future,” noted a South Dakota respondent.
Interest rates had a minor impact on business conditions, according to most firms. Half of respondents reported no changes to their business due to credit conditions. However, 15 percent said they decreased their capital spending because of tighter credit, and 13 percent said they decreased their hiring.
Looking ahead, services companies were somewhat optimistic about the coming 12 months. A larger share of firms anticipated higher revenues over the next four quarters than the share that expected declines, and on balance firms expected profits to rebound slightly. Productivity and employment were also expected to increase as well, though most firms expected these indicators to stay level.
Firms also expected price pressures to continue; 57 percent said they expect to pay more for inputs, while only 3 percent forecast reduced costs. Just over half anticipated no change to the prices that they charge to customers, but 39 percent expected to increase prices further in the year ahead. But firms expected wages to continue to moderate, as well: Over the next four quarters, firms expected wages to increase by an average of 3 percent and benefits to increase slightly more than that.
By contrast, services firms had pessimistic forecasts for general economic conditions. Respondents expected employment in their states to decrease slightly on balance over the next year, and outlooks for consumer spending and corporate profits were sharply negative. With regard to inflation, two-thirds of respondents predicted increases in their states over the next 12 months, while only 11 percent believed that inflation would fall.
| Total (294 responses) | ||||||
|---|---|---|---|---|---|---|
| How did your location perform during the last four quarters compared with the prior four quarters? | Up | Same | Down | Diffusion index* | ||
| Sales revenue | 40% | 30% | 30% | 55 | ||
| Profits | 31% | 32% | 37% | 47 | ||
| Productivity | 28% | 52% | 20% | 54 | ||
| Employment level | 22% | 61% | 17% | 53 | ||
| Labor availability | 12% | 65% | 23% | 45 | ||
| Selling prices | 48% | 44% | 8% | 70 | ||
| Input costs | 69% | 29% | 2% | 84 | ||
| Space occupied (square footage) | 11% | 84% | 5% | 53 | ||
| Exports (sales to foreign clients) | 5% | 89% | 5% | 50 | ||
| How do you expect your location to perform during the next four quarters? | ||||||
| Sales revenue | 37% | 42% | 21% | 58 | ||
| Profits | 32% | 38% | 30% | 51 | ||
| Productivity | 28% | 59% | 13% | 57 | ||
| Employment level | 25% | 64% | 11% | 57 | ||
| Labor availability | 11% | 69% | 20% | 46 | ||
| Selling prices | 39% | 54% | 8% | 65 | ||
| Input costs | 57% | 41% | 3% | 77 | ||
| Space occupied (square footage) | 8% | 86% | 6% | 51 | ||
| Exports (sales to foreign clients) | 6% | 91% | 4% | 51 | ||
| What is your outlook on the following state economic indicators during the next four quarters? | ||||||
| Employment | 19% | 58% | 23% | 48 | ||
| Consumer spending | 15% | 36% | 49% | 33 | ||
| Inflation | 64% | 26% | 11% | 76 | ||
| Corporate profits | 20% | 38% | 41% | 40 | ||
| Mergers and acquisitions | 33% | 51% | 17% | 58 | ||
| Previous four quarters | Decrease | 0% | 1%–2% | 3%–5% | 6%–10% | >10% |
| Wages per worker | 3% | 18% | 10% | 50% | 14% | 6% |
| Benefits per worker | 2% | 33% | 8% | 24% | 22% | 12% |
| Next four quarters | ||||||
| Wages per worker | 2% | 22% | 16% | 51% | 6% | 3% |
| Benefits per worker | 0% | 36% | 12% | 31% | 14% | 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.
