Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy grew slightly this cycle, down from the modest pace of growth reported in our previous report. Consumer spending rose mildly but there were reports of consumers pulling back on big ticket items and becoming more price conscious at restaurants. Leisure and business travel, on the other hand, increased moderately. Residential real estate showed a typical seasonal slowdown while commercial real estate leasing activity picked up slightly. Import and export volumes rose moderately as retailers resumed more typical ordering patterns; however, manufacturers in our District reported softening demand. Employment rose slightly in recent weeks and wages continued to rise at a moderate rate. For some businesses, wage growth outpaced price growth and led to tighter margins.
Labor Markets
Employment in the Fifth District grew at a slight pace in the most recent reporting period. Hiring was mixed based on business performance. A precision sheet metal fabricator laid off a quarter of staff since last year due to declining orders. A furniture textile manufacturer has not backfilled positions because of declining demand for residential furniture. For contacts that were hiring, persistently higher rates of wage increases continue to put pressure on margins. A donut shop raised their prices due to increased labor costs to catch-up with decreased profits. A pet groomer was investing in equipment and process improvements to reduce labor costs. Lastly, a thrift store raised wages and found that worker quality increased, although doing so impacted their margins.
Prices
Price growth was little changed in recent weeks and remained at a moderate year-over-year rate. According to our most recent surveys, annual growth in prices received by service providing firms edged down but remained elevated at around three and a half percent. Meanwhile, growth in prices received by manufacturers rose slightly to about two and half percent, year-over-year. Several contacts said that their ability to raise prices was more constrained due to customer push back on price increases. Some added that their profit margin was compressed as costs and wages continued to rise.
Manufacturing
Fifth District manufacturing activity declined slightly in the most recent period. Several contacts in interest-rate sensitive sectors reported that changing customer preferences slowed demand. A furniture manufacturer reported declining orders due to higher interest rates and consumers not wanting to purchase new furniture on credit. A wall panel manufacturer reported demand being off due to customers being cautious and looking for discounts before placing orders. Manufacturers also reported increased input costs. A coffee roaster reported higher prices for freight, insurance, and packaging. A food manufacturer also reported increased costs for inputs but couldn't raise prices due to pushback from retailers concerned that the end customers wouldn't accept higher prices.
Ports and Transportation
Ports in the Fifth District reported moderate increases in imports and exports due to normalized purchase order patterns from retailers and global manufacturers. Imports of furniture and sporting goods were up, but contacts reported otherwise flat demand for durable goods and modest growth expected for the year. During this period, container spot rates surged 200 percent higher than last year due to capacity constraints and long transit times around the Cape of Good Hope. Rebounding water levels in the Panama Canal have allowed for vessel restrictions to be lifted, which may impact ocean carrier route plans in the coming months. The Port of Baltimore has reopened to full channel depth and width capacity, however in South Carolina, a system-wide software issue in May and a container spill in June caused temporary delays in port operations.
Air freight demand during this period was moderately down from last year, continuing a yearlong trend. One contact cited geopolitical tension between the US and China as a contributing factor in losing two weekly cargo flights from South Carolina to Shenyang (25 percent of the airport's cargo freight operation.) Respondents in the trucking segment lamented weak demand and carrier rates as low as $1.10 per mile. Firms noted a shift in owner-operators closing their business and returning to work at bigger companies, defaults on chassis rentals, and "sticky" high prices of equipment causing them to hold on to old vehicles and trailers longer than desired.
Retail, Travel, and Tourism
Overall, consumer spending increased slightly this reporting period. Individual reports, however, were mixed. Several retailers reported steady to slightly lower sales and revenue with less customer traffic and fewer big-ticket purchases. A restaurateur and an ice cream chain owner reported flat sales at a time of year where they typically experience growth. The restaurateur added that the average revenue per customer was flat but customers were ordering fewer menu items in response to higher prices. Hotel and travel contacts reported solid growth in recent weeks, particularly from leisure travel in places like coastal North and South Carolina. Business travel picked up slightly but remained at a lower level compared to pre-pandemic levels. Additionally, an airport contact noted that people seemed to be extending travel that was for a business reason to include some leisure activities.
Real Estate and Construction
Residential real estate activity showed a typical slowdown heading into the summer months. While there was a gradual increase in homes hitting the market, total closings remained steady. Prospective buyers were facing challenges with higher prices and rates rather than approvals or appraisals. Online buyer traffic was on the rise, contrasting with a decline in in-person visits. New construction was expanding in regions experiencing population growth.
Commercial real estate activity increased slightly in recent weeks. Retail leasing picked up, keeping vacancy rates low due to limited new inventory being quickly absorbed. In the office sector, leasing increased for Class A spaces but declined for Class B and C properties, widening the vacancy gap between different qualities of office space. Agents in Virginia and Maryland noted tenants were "rightsizing" their office needs and upgrading from Class B to Class A space. Leasing and absorption observed in new multi-family buildings were also strong. On the contrary, developers were facing challenges with project approvals due to higher interest rates and local government policies impacting financial viability amid rising labor costs. Sales in the commercial sector were minimal.
Banking and Finance
Financial institutions reported that overall loan demand remained modest, but within certain loan types, such as home equity loans and used autos, they reported modest increases in demand. Those institutions that noted an increase in demand for commercial loans also noted this demand was driven by special loan rates or a lack of competitors within that segment. Deposit levels continued to decline modestly, and competition was still strong for any balances that came into the market. There was no change in underwriting standards noted for any new requests and loan delinquency rates remained stable across all loan types.
Nonfinancial Services
Nonfinancial service providers continued to report that demand for their services as well as their revenues remained stable. An engineering firm reported that competition within their market remained strong, with other firms reducing their rates to gain new business. Another respondent noted they were investing in equipment and process improvements to reduce increasing labor costs that have impacted their margins. A staffing firm indicated a slight uptick in demand for their services from the first quarter of this year. They were also investigating the use of artificial intelligence within their business to help automate some initial hiring processes.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.