Fifth District Survey of Service Sector Activity

Feb. 28, 2017 10 a.m.

Revenues Strengthened at Services Firms; Businesses Were Increasingly Upbeat about Prospects

Overview

Activity in the service sector continued to improve in February, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues rose more widely this month among services firms. The expansion slowed at retail establishments, despite continued strength in big-ticket sales. Shopper traffic fell and inventories rose modestly. Survey respondents were buoyant about business prospects for the six months ahead.

Reports of increases in the number of employees moderated. Additionally, wage increases were less prevalent, according to surveyed executives.

Service sector prices rose more slowly on average this month. Expectations were for more rapid average price increases during the next six months.

Service Sector

Revenues in the overall service sector continued to grow at a moderate pace in February, holding the index at 15 for a second month. Firms added employees, although that indicator dipped one point from the previous reading to 7. Expansion of average wage increases pulled back this month, leaving the index 10 points lower at 14. In contrast, optimism was widespread in February, driving the index for expected demand to 51 from last month's reading of 38.

Retail Firms

Retail sales softened this month, with the index cooling 28 points to settle at 12, despite continued strength in big-ticket sales. The big-ticket gauge ended three points below the January reading at 29. Retail inventories moved higher, pushing the index up nine points to 11. Shopper traffic waned broadly, with the indicator dropping 43 points to −7 in February. Although more merchants reported softness, expectations rose for business in the next six months; the index added 18 points to end the survey period at 69.

Retail hiring was nearly flat; the index shed six points, finishing at 1 in February. Average wages climbed among more retailers, pushing the indicator up four points from a month earlier to end at a reading of 26.

Services Firms

Services firms increasingly reported revenue growth compared to a month earlier. The index rose to 16 from January's reading of 11. Hiring was little changed; the index for the number of employees shaved a point to settle at 7 this month. Average wage increases were less prevalent as well, with the index dropping to 12 compared to the previous reading of 24.

The outlook of surveyed firms strengthened further this month, with the index for expected demand for services rising to 49 from January's reading of 36.

Prices

Service sector prices moderated slightly overall compared to a month ago. The annualized average increase for the broad service sector was 1.49 percent in February, following growth of 1.65 percent. Among retailers, prices rose slightly faster, at an annualized 2.82 percent rate. In January, retail prices climbed by 2.79 percent. At other services-providing firms, the pace of prices moderated to an annualized 1.32 percent pace, compared to January's 1.45 percent rate.

Looking ahead six months, survey takers anticipated overall service sector price growth at an annualized 1.95 percent rate, slightly above January's expectations for a rise of 1.84 percent. Retail establishments expected an uptick to 3.45 percent price growth in the months ahead, compared to their previous outlook for 3.02 percent price growth. At other services firms, expectations were also for faster price growth during the next six months. Expectations were for 1.75 percent annualized price growth; in January, services firms looked for future price increases of 1.63 percent.

Index Table

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