Federal Reserve Bank of Richmond
Summary of Economic Activity
Economic activity in the Fifth District was little changed in recent weeks. Port activity and trucking volumes remained solid, particularly for shipments of consumer goods as retailers looked to replenish inventories. Consumer spending on retail goods softened slightly, however, but contacts believed that adverse weather was the primary reason for the decline in sales and foot traffic. Residential and commercial real estate markets improved somewhat, but financial institutions reported less loan demand this period. Nonfinancial services demand, on the other hand, was unchanged. Employment grew moderately with some employers finding it easier to hire. Price growth was unchanged in recent weeks.
Labor Markets
Employment in the Fifth District grew at a moderate pace in recent weeks. Contacts diverged on labor availability depending on the type of worker needed, with skills and trades-workers more difficult to find. For example, an outdoor goods retailer commented they still struggled to find workers–which they mentioned isn't unusual in retail–but the market was better than in 2021–2022. An advertising firm reported a complete one-eighty from last year, and candidates are finding them now and not the other way around. Conversely, an engraver told us that after a very long search, they finally found good help, which felt like finding a needle in the haystack. An aluminum welder reported that due to a lack of skilled workers, they extended lead times and increased prices to cover overtime labor costs.
Prices
Price growth was little changed since our previous report, keeping year-over-year price growth moderately elevated. According to our most recent surveys, growth in prices received by nonmanufacturers remained around four percent while growth in prices received by manufacturers held steady at a rate around 2.5 percent. A few service providers said that labor and input costs continued to rise but they are unable to push further price increases to customers, so margins were being compressed. Firms in both sectors expected price growth to moderate over the next six months.
Manufacturing
Fifth District manufacturing activity softened in the most recent period amid uncertainty about business conditions. An asphalt producer reported that several highway jobs ended in early 2024 with no new jobs to replace them, which will lead to a 10 percent decline in volume. A coffee manufacturer reported challenges getting freight through the Red Sea, impacting production times and future costs. Several contacts reported difficulty getting financing, including a laundry equipment manufacturer that was forced to rely on alternative financing companies with higher interest rates than banks. The lack of qualified labor remains a major issue for most contacts. A lumber company reported a possible reduction in investment in their region due to a lack of suitably skilled workers.
Ports and Transportation
At Fifth District ports, underlying demand was good this period despite disruptions in the Panama and Suez canals impacting schedules. Carriers were doing fewer blank sailings in order to account for issues with the key transit routes. The volume of loaded imports was slightly lower this period, but respondents noted an increase in imports of consumer goods. Loaded export volumes were unchanged. Spot rates increased sharply as carriers were trying to offset higher costs associated with the longer transit times. Empties were flowing well and there was no stack congestion at the ports. Demand for airfreight was flat this period and rates were down due to excess capacity.
Underlying trucking demand was good this cycle, but some freight volumes were impacted by winter weather. In the truckload segment, there continued to be excess capacity. In the less-than-truckload segment, firms noted increased demand in the consumer segment as retailers were replenishing their inventories. In the truckload segment, rates were down as customers were pushing to decrease their shipping costs. Transactional rates remained unchanged in the less-than-truckload segment and those trucking companies were able to negotiate modest increases in their contract rates. Respondents stated that drivers were more readily available, but mechanic and some office positions were still difficult to fill this period.
Retail, Travel, and Tourism
Retailers reported a slight decline in sales and customer foot traffic in recent weeks. Several contacts mentioned adverse weather conditions kept shoppers from coming out to stores. A few retailers in the home improvement and building supply segment attributed some of their decreased sales to a slow real estate market and higher costs of borrowing to finance home improvement projects. New vehicle sales declined modestly. Hotel and restaurant contacts noted a slight slowdown in activity in recent weeks. One hotel chain manager said that leisure travel was steady but down from its peak, and business travel was still a fraction of what it was compared to pre-pandemic levels. In the Northern Virginia market, where travel had been slow to return, hotel revenues were reportedly up as those hotels were now able to increase room rates amid steady occupancy rates.
Real Estate and Construction
In the Fifth District, residential real estate activity improved slightly this period as there remained pent up demand in the housing sector. Respondents noted an increase in listings and buyer activity. However, the elevated mortgage rate made buyers more tentative on making home purchase decisions. Sales prices have flattened, but there were still multiple offers on many homes. Days on market increased slightly but remained below historic averages. The home construction market was constrained as it was difficult to find land and to receive permitting for new developments. Residential construction costs started to moderate this period.
Overall market activity in commercial real estate improved slightly this period. In the office sector, there was more leasing activity related to firms upgrading their space and moving away from central business districts. Landlords were offering concessions or incentives to potential office tenants in lieu of higher rents. Retail space in the suburbs remained limited with low vacancy rates and increased rental rates. The rapid rise in interest rates in recent years has resulted in declining commercial real estate values and a dearth of investment sales. The lack of available financing and rising building costs continued to constrain new construction, especially for office and multifamily projects.
Banking and Finance
Financial institutions continued to report a modest softening of demand across all loan types. Higher interest rates and continued uncertainty with the overall economy continued to be the reasons noted for this softening. Deposit levels were beginning to show modest declines, with rates remaining flat and competition for deposits remaining high. Loan delinquency rates have begun showing modest increases, primarily in the unsecured personal and auto portfolios. Credit quality of new borrowers, however, remained stable with no institutions mentioning a change to their underwriting standards based on the current conditions.
Nonfinancial Services
Nonfinancial service providers continued to report that demand for their services as well as revenues remained stable. A design firm stated that election years often have negative impacts on the demand for their services because larger companies become more conservative with their budgets until the election is decided. A law firm also reported that the demand for their services was down, but they are observing more clients gaining optimism and entertaining merger and acquisition offers as well as real estate development opportunities. Wages and workforce were becoming less of a challenge with both showing modest stabilization.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.