District services firms continue to grow
Businesses anticipate continued expansion over the coming year
Published July 11, 2019
The past year brought more growth for professional services firms in the Ninth District, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. These businesses also anticipate continued expansion in their activity and in the broader economy over the coming year.
These results reflect responses from 371 firms in accounting, consulting, design, engineering, marketing, and other professional services across the Ninth District. The survey, conducted in May and June, asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the next 12 months.
For the most part, the past year was a financial success for 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; below 50 indicate contraction.
Nearly half of firms reported increased sales revenue over the past year, while 30 percent saw steady sales. Profits, productivity and employment also expanded over the period. In spite of this growth, a strong majority of respondents reported that the amount of space they occupy was flat.
Slightly more than half of respondents also noted an increase in their input costs, while a third reported that they increased the prices they charge to clients. In response to a separate question, most reported that credit conditions were a minor factor in hiring or capital spending decisions.
However, more than a quarter of the businesses surveyed said that labor had become less available, while only 5 percent reported an increase in labor supply. Even so, increases in employee compensation were generally modest. Wages rose 3 percent on average, while benefits costs increased 2.4 percent, according to respondents.
Looking ahead, services companies are optimistic about the coming year. Substantially more firms anticipate increased revenues and profits over the next four quarters than expect declines. Productivity and employment are also expected to increase, on balance, though a majority of firms expect these indicators to stay level.
Slightly fewer than a quarter of firms intend to raise prices, while only 6 percent expect to cut prices. Planned price hikes may in part be a response to higher costs; 39 percent of firms expect to pay more for inputs, while only 3 percent foresee reduced costs. Most anticipate modest wage increases; over the next four quarters, firms expect wages to increase by an average of 2.3 percent and benefits by slightly less than that.
Regarding general economic conditions, the number of professional services firms expecting employment in their states to rise over the next year was more than three times the number predicting a drop. Corporate profits and consumer spending were also expected to increase across district states.
Finally, a slight majority of respondents predict stable inflation over the next 12 months, while only 2 percent believe that inflation will fall.