The number of working hours were up in June, “perceptions of broader business conditions” rebounded, and outlooks for employment and capital expenditures remained in “solidly positive” territory according to the Federal Reserve Bank of Dallas' latest numbers.
The service sector, which employs a majority of American workers and accounts for a significant portion of the GDP gets consistent close scrutiny from the Dallas bank.
The service sector runs the gamut from roofing companies and financial planners to hospitals, casinos, newspapers, department stores, to real estate sales, hair salons and museums. It accounts for most everything other than companies that manufacture something or mine, dig or drill for natural resources.
The Dallas Fed’s district is all of Texas, 26 parishes in north Louisiana and 18 counties in New Mexico, but the service sector questions were aimed only at Texas businesses.
Polled companies told the Fed that revenue, full-time employment, wages and benefits, and capital expenditures were up, but so, too, were input prices and the sales price of their products and services. Input prices are what the businesses pay for the goods and services they need to produce their own products or services.
Company outlook also took a wide swing from May, jumping from a negative 5.4 to positive 6.1. Over the next six months, the overall mood of the businesses that responded is that wages and benefits, input prices and selling prices will all continue to rise.
There are still a variety of concerns
Inflation and input costs are the number one concern, topping geopolitical uncertainty, which has fallen about 20 points. Fears of potential recession are unchanged from May, while worries of higher labor costs, labor shortages, and the cost of credit are on the rise.
The special questions asked by the Fed and comments from businesses make for an interesting look behind the curtain.
One appliance store respondent shared, “Customers are only replacing the appliances that have broken down.”
In the food service/drinking places category, one respondent was worried that the repercussions of higher costs were being felt.
“We are beginning to face headwinds and some softening in sales and foot traffic at some locations for the first time in the company's 16-year history. Customers are pushing back on product costs, and demand has clearly softened. Our sense is that our customers may finally be feeling the pinch of high energy costs and general inflation.”
A motor vehicle and parts dealer also pointed at costs: “Consumer confidence is weak, and transaction prices are inflated. High interest rates are causing monthly payments to be more than consumers can afford.”
Multiple comments came from professional, scientific and technical services businesses. They included problems caused by the Iran War, general uncertainty, fuel costs and wage pressures. Another expressed concern that nonprofits were beginning to tighten spending.
In real estate, one respondent worried “It is (becoming) more difficult for first time buyers to afford homes,” and from another who handled rental property, “In analyzing the personal finances of delinquent renters, we find it is not so much about inadequate pay or rents that are too high; many are wasting inordinate amounts on delivery services, fast food, buy-now-pay-later schemes, media services, vices and other financial sinkholes.”
A transportation support business was upbeat. “We should be having a great cotton harvest season,” and from one utility, some optimism. “Since the Iran war has settled down, things are looking better.”
The next Fed Service Sector Outlook is planned for late July.