U.S. businesses expect sales to grow at the fastest pace in more than four years, signaling that demand remains strong even after accounting for anticipated price increases.
Businesses surveyed by the Federal Reserve Bank of Atlanta in August expect sales revenue to rise 5.8 percent over the next four quarters, up from 5.1 percent in July, according to data released Wednesday.
The survey’s smoothed measure of expected sales growth rose to 5.7 percent, the highest since June 2022 and well above its average of 4.5 percent since late 2016. The measure has remained above five percent for nine consecutive months.
Because the survey measures sales revenue, some of the anticipated increase reflects higher prices rather than greater quantities of goods and services sold. Businesses expect their selling prices to rise 3.2 percent over the coming year. Adjusting sales growth for that expected price increase implies real sales growth of approximately 2.6 percent.
The estimate is necessarily rough because the survey aggregates individual firms’ expectations rather than measuring economy-wide real output. Still, it suggests that businesses anticipate a substantial increase in the volume of goods and services sold, rather than merely higher nominal revenue generated by inflation.
The strength was broadly distributed. The median of the survey’s expected sales-growth distribution was 4.9 percent in August. The 75th percentile was 9.5 percent, and the 90th percentile rose to 16.3 percent. Even the 25th percentile anticipated sales growth of about one percent. Only the bottom decile expected declining revenue.
Firms also reported a sharp acceleration in sales already achieved. Realized sales growth over the preceding four quarters rose to 7.2 percent in August from 5.0 percent in July, the highest reading since May 2023. Median realized sales growth increased to 6.4 percent, while the 75th percentile reported growth of nearly 14 percent.
Realized selling prices increased 3.6 percent, suggesting real sales growth of approximately 3.4 percent after adjusting for price increases. The combination of strong realized growth and elevated expectations indicates that companies see the recent expansion in demand continuing over the coming year.
Employment expectations were less exuberant but remained positive. Businesses expect employment to grow 0.9 percent over the next 12 months, based on the unsmoothed August reading, down from 2.1 percent in July. The smoothed measure declined to 1.3 percent from 1.5 percent.
Those figures take on greater significance in an economy with a slowly expanding workforce. Employment growth around one percent could be enough to maintain pressure on a labor market increasingly constrained by demographics and limited growth in labor supply.
The widening gap between expected sales and employment growth may also indicate that businesses anticipate higher productivity. Firms expect to produce and sell considerably more without adding workers at a comparable rate, potentially reflecting greater capital investment, automation or more efficient use of existing employees.
Inflation signals were mixed. Expected cost growth declined to 4.2 percent in August from 4.7 percent in July, based on the unsmoothed data. Expected selling-price growth edged up to 3.2 percent from 3.0 percent. Businesses therefore expect their costs to rise faster than the prices they charge, a potential source of pressure on profit margins.
Uncertainty about costs and selling prices declined in August. The smoothed measure of sales uncertainty remained elevated compared with the unusually calm years before the pandemic but stood close to its lowest level since the pandemic began. That suggests businesses have become increasingly confident in their expectations for continued sales growth.
The Atlanta Fed’s Survey of Business Uncertainty asks firms to assign probabilities to different outcomes for sales, employment, costs and prices over the year ahead. The latest results point to an economy in which businesses expect vigorous nominal growth, solid increases in real sales, and continued demand for labor despite constraints on workforce growth.
Read the full article here