Federal Reserve Bank of Richmond
Summary of Economic Activity
Economic activity in the Fifth District slowed mildly this cycle, reversing from a slight increase reported last period. Consumer spending on retail goods, vehicles, and tourism declined in recent weeks. Manufacturing activity contracted slightly, as well. Residential real estate activity softened alongside mortgage loan demand; however, banks noted an increase in demand for home equity lines of credit. Commercial real estate activity picked up slightly amid an increase in demand for retail leasing and continued strength in industrial construction. Port activity picked up moderately while trucking demand remained flat. Employment increased slightly in recent weeks and several contacts said that they were not looking to make changes to headcounts at this time. Price growth slowed slightly but remained elevated on a year-over-year basis.
Labor Markets
Employment in the Fifth District increased slightly in the most recent period. Several contacts reported satisfaction with current headcounts and were only backfilling for necessary positions. Other contacts were allowing headcounts to decline mainly through attrition. A software company did not expect to increase headcounts due to adequate staffing levels that could handle increases in demand. Finding skilled workers continued to be a challenge. A construction company reported plenty of work but not enough staff despite advertising for open positions. Some businesses reported positive changes in skilled-worker availability. A brewer increased wages in their production department and attracted higher-skilled workers while decreasing turnover. A stone cutter reported more interest in learning trades due to investments at the local community college. Worker wage expectations continued to be higher than what firms wanted to offer.
Prices
Price growth slowed somewhat this cycle but year-over-year growth in prices remained elevated, particularly for services. According to our most recent surveys, annual growth in prices received for services stayed elevated; price growth has generally remained between three and a half and four percent so far this year. Meanwhile, year-over-year growth in prices received by surveyed manufacturers edged lower, falling below two percent in the most recent reading.
Manufacturing
Fifth District manufacturing activity declined slightly in the most recent period. Several contacts mentioned softening conditions. A manufacturer that supplies the hospitality industry reported a decline in equipment sales due to their equipment being used less and not needing to be replaced. A millwork manufacturer reported that persistently high inflation has caused customers to not "upgrade their lifestyles," resulting in order declines. Several contacts reported optimism about future demand. For example, a North Carolina machines manufacturer expects increased business due to new customers moving into the area. Additionally, a cabinet manufacturer's orders picked up as construction clients broke ground on previously delayed projects because they expected interest rates to drop soon.
Ports and Transportation
Ports in the Fifth District reported moderate increases up to 7 percent in containerized cargo volumes due to peak season retail activity. Contacts expect this to continue into the third quarter and flatten later in the year. Increased capacity in ocean shipping has normalized air cargo volumes with heavy materials like rubber moving back to sea and road freight. Reductions in air freight movement led one Fifth District airport to downsize their cargo workforce by almost fifty percent. Container prices have rapidly increased with spot rates four times higher than they were in October 2023.
In the trucking segment, demand was steady at an unseasonably low level of volume. Contacts cited high interest rates and the upcoming election as causes of uncertainty contributing to the suppressed demand. Pricing held steady as firms negotiated contract increases, but downward price pressure was reported for road freight. Trucking firms reported a downward drift in driver headcount through the year as vacant positions were not being filled.
Retail, Travel, and Tourism
Consumer spending softened slightly in recent weeks. A majority of retailers reported a mild decline in both sales and shopper traffic. A hardware store said that average ticket sales per customer were down as fewer big-ticket purchases, such as grills and power tools, were being made. A fast-casual restaurant chain said they were focusing on launching new value offerings in hopes to boost sales in the coming months. Light vehicle and motorcycle sales were down modestly, which some contacts attributed to elevated interest rates making the cost of financing more expensive. Consumer spending on travel and tourism also contracted slightly. Hotels in coastal regions of North and South Carolina reported a decline in room nights sold, but the decline was from a high level in previous months.
Real Estate and Construction
Residential real estate activity showed a slight decrease in buyer traffic and a flattening in sales, which agents said was better than expected for this time of year. Additionally, home listings and new home construction were beginning to decrease slightly. According to an agent in Virginia, those who were thinking about listing were struggling with losing lower mortgage rates. Agents brought up the National Association of Realtors (NAR) policy changes, but there were mixed perspectives about the potential impacts this will have on residential real estate; some were concerned about buyers' ability to afford or finance their agent's commission.
Commercial real estate activity continued to increase slightly in recent weeks. Retail leasing picked up, but sales remained flat. New construction continued for pad sites, such as gas stations and fast food, and for repurposing of vacant retail buildings. Office space continued to see rightsizing with more investments going towards luxurious aesthetics to create a "country club feel," as one Virginia agent noted. Industrial remained strong with some projects being limited by power and site availability. Commercial investors were increasingly struggling with loans maturing and were declining replacement rates and potential new buyers were sitting on the sidelines.
Banking and Finance
Financial institutions reported a softening of loan demand primarily in the commercial real estate and business loan portfolios. However, lenders continued to see modest increases in the demand for home equity lines of credit. Some lenders started to report a slight increase in mortgage loan refinancing activity brought on by the downward movement in rates. Institutions were seeing a stabilization in deposit levels, but competition remained strong in the marketplace for new balances. Some lenders noted that they have started to see a decline in the credit quality of borrowers, but delinquencies remained stable.
Nonfinancial Services
Nonfinancial services providers continued to report that demand for their services and their revenues remained stable. An executive search firm reported that an increase in unemployed tech professionals had softened the need for their firm's services, as their clients were finding it easier to fill positions on their own. A few firms noted their clients felt hesitant because of international conflicts, uncertainty within the economy, and the upcoming election, and therefore they were delaying investments. Another respondent reported less discretionary spending by their customers because consumers seemed nervous about the economy.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.