Business brisk at professional services firms; more growth expected

Joe Mahon | Director, Regional Outreach

Published July 9, 2018

“Our economy is booming,” said a marketing firm in Michigan’s Upper Peninsula. “We are at full employment in our area.” This comment reflected the sentiments of consultants, engineers, staffing agents, advertisers and other professional services firms in the Ninth Federal Reserve District, in a mid-year survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

Overall, the results indicated that business services firms grew over the past 12 months, and expect growth to continue both at their firms and in the broader economy. However, labor availability remained a challenge and input costs crept up at many firms.

More than 350 services firms, selected at random, responded to the survey, conducted in May and June. They were asked about their experience over the most recent four quarters and their expectations for the coming four quarters.

Responses indicate that the period was a financial success for most professional services firms in the region. The accompanying chart presents survey results as a “diffusion index,” which indicates an increase or decrease, on average, over the previous four quarters. Values above 50 indicate expansion, those below 50 indicate contraction.

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More firms than not reported that their sales or profits increased or held steady over the previous four quarters. Employment and productivity also expanded over the period, although respondents noted an increase in input costs and the prices they charge for services. In response to a separate question, a strong majority reported that credit conditions were not a major factor in hiring or capital spending decisions.

However, nearly a third said that labor had become less available, while only 8 percent reported more labor availability. Wages rose 2.8 percent, on average, and benefits per worker increased 2.4 percent, according to respondents.

A special question asked about impact of recent changes in federal tax legislation on business. The large majority of respondents reported no changes in employment (82 percent), prices charged (81 percent), capital expenditure (71 percent), wages (69 percent), customer demand (66 percent) and profits (61 percent).

Looking ahead, services companies are optimistic about the coming year. More firms anticipate increased sales revenue and profits over the next four quarters than expect declines. Productivity and employment are also expected to increase.

More than a quarter of firms intend to increase prices, while only 4 percent expect to cut prices. Planned price hikes may be partly in response to higher costs; 45 percent of firms expect to pay more for inputs, while only 2 percent foresee reduced costs. Most anticipate moderate wage increases. Over the next four quarters, firms expect wages per worker to increase by an average of 2.5 percent and benefits by 2.1 percent.

Asked about their outlooks for the broader economy, the number of professional services firms expecting employment in their states to increase over the next year was six times the number predicting a drop. Corporate profits and consumer spending were also expected to increase across district states.

Finally, nearly two-thirds of respondents predict higher inflation over the next 12 months; only 2 percent believe that inflation will fall.

See the 2018 Professional Services Business Conditions Survey Results