Federal Reserve Bank of Richmond
Summary of Economic Activity
Economic activity expanded slightly this cycle. Consumer spending on retail, travel, and tourism was flat to up slightly in recent weeks. Areas of the Fifth District that were impacted by Hurricane Helene saw a decline in consumer spending and leisure travel but also a pick-up in repair services and hotel occupancy from out-of-town workers. Port activity was off moderately due to disruptions that occurred during the brief worker strike and because carriers diverted cargo to the West Coast amid ongoing negotiations with the union. Employment was little changed this cycle while wages continued to rise moderately. Price levels were largely unchanged in recent weeks and prices were up moderately compared to last year.
Labor Markets
Employment was little changed in recent weeks. Many businesses reported keeping employment levels unchanged. While some firms reported hiring for select positions, others were letting total headcount decline naturally through attrition. Some firms continued to report challenges finding workers. A web design firm looked to convert part-time employees to full-time rather than try hiring external candidates. A financial services company received resistance from job candidates because they wouldn't offer fully remote work. Wages grew moderately on average. A thrift store reported lower margins due to wage increases that could not be offset with increased prices. Several health care companies reported that despite unchanged demand, profit margins have decreased due to increasing hourly wage rates.
Prices
Price levels were little changed in recent weeks. On a year-over-year basis, prices were up moderately. According to our most recent surveys, service sector firms reported moderate annual price growth. Meanwhile, prices charged by manufacturing firms grew at a modest annual rate. Many firms commented that input costs, including labor, have continued to rise while their ability to pass price increases along have been limited and therefore profit margins were declining. Some businesses were concerned that supply chain disruptions from the recent port strike would lead to further cost increases in coming weeks.
Manufacturing
Manufacturing activity declined slightly in the most recent reporting period. Hurricane Helene caused disruptions for many manufacturing firms across the Fifth District. A food manufacturer lost five production days, infrastructure, and livestock due to the hurricane and estimated six-to-nine months to become fully operational. New orders activity was mixed. A steel fabricator reported that larger projects were replaced with smaller projects, likely due to uncertainty around interest rates. A coffee manufacturer reported a slowdown in new orders from existing customers who were experiencing lower sales. A dental laboratory reported lower-than-usual incoming volume and pricing pressure that had eaten away at margins.
Ports and Transportation
Overall, ports experienced a moderate decrease in cargo volumes with some variance in magnitude across the Fifth District. Contacts reported that containerized imports were down between five and fourteen percent and exports were down as much as twenty-nine percent. While the September worker strike had little immediate effect on port operations, carriers have diverted some cargo routes to the West Coast until contract negotiations resume in January. Agricultural exports coming from the Midwest by rail were particularly impacted by the strike with delays in loading cargo and cascading imbalances in the rail car network getting empty cars back to the East Coast. Manufacturers noted considerable concern about the possibility of another strike, citing a reliance on imports of raw materials and exports of their products.
Trucking demand in the Fifth District was little changed, with some additional volume from the West Coast due to the port worker strike. While the spot rate market has shown signs of normalization, contacts described being selective about taking on more profitable jobs and holding onto older equipment due to costs affecting their margins.
Retail, Travel, and Tourism
Consumer spending increased slightly in recent weeks. A few retailers said that sales and shopper traffic were down, which they attributed to several potential factors including election uncertainty and consumers waiting for the holiday sales season to make big ticket purchases. Additionally, a thrift store said that their customers had less disposable income due to higher costs for housing and other necessities. Consumer spending on travel and tourism was flat, overall, but varied across the Fifth District. In western North Carolina and Virginia, leisure tourism was negatively impacted by the damage sustained by Hurricane Helene; however, hotel occupancy was up as the repair efforts brought workers into affected areas. A marine equipment retailer said they lost sales during a typically busy time of year, but they expected sales to bounce back as lost or damaged equipment was replaced.
Real Estate and Construction
Residential real estate activity softened slightly this cycle. Many agents attributed this to the typical fall/winter slowdown and buyers holding out for rate cuts. While online buyer traffic activity remained robust and buyers were not having issues qualifying, days on market continued to increase by single digits. Agents noted new construction continued. Multiple agents noted that developers are getting creative with designs and density to speed up the local government zoning processes. One agent in Virginia stated his fear of a growing oversaturation in the condo market.
Commercial real estate activity remained flat. Agents continued to note a decrease in vacancies in prime office spaces but rising vacancy in lower-grade markets. Since the election, an agent in South Carolina noted more chatter about selling but no moves happening yet. Two Virgina agents noted their fears of commercial loans coming to term in conjunction with sales prices going down.
Damages from Hurricane Helene were beginning to be seen in both residential and commercial real estate markets. A North Carolina agent noted residential sales being off 25 percent in the Boone area and 30 to 35 percent in the Asheville market. Longer-term impacts to commercial real estate were more uncertain as many buildings were destroyed and businesses continued to close in recent weeks.
Banking and Finance
Financial institutions continued to report a modest increase in loan demand, with the increases being seen primarily in real estate secured loans in both the commercial and consumer portfolio. This modest demand was primarily driven by the current lower rate environment. Loan pipelines were described as smaller than historical levels but were still considered healthy. Credit quality of borrowers continued to remain stable, but some respondents did note that they were experiencing a modest increase in their past due loans, mainly in the consumer portfolio. Deposit balances continued to remain stable, with competition still strong for funds in the marketplace.
Nonfinancial Services
Nonfinancial services providers continued to report little change in demand for their services and revenues remained stable. An engineering firm reported that there is a continued reluctance for clients to move forward on projects. A digital services firm, as well as other respondents, echoed a similar sentiment with an observation that clients are reducing budgets for the coming year. Another firm reported that they were holding onto staff in hopes of an improvement in conditions, but they may have to make tough decisions if demand declines going into the new year.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis .