Federal Reserve Bank of Richmond

Summary of Economic Activity

The Fifth District economy grew modestly since our previous report. Consumer spending on retail, travel, and tourism increased moderately to end the year. Nonfinancial services firms reported no change in revenues amid subdued demand while financial service providers saw a modest increase in loan demand. Manufacturing activity slowed slightly. Firms across a variety of sectors voiced concerns and uncertainties around tariffs, port worker strikes, and general economic conditions moving into the new year. Residential real estate experienced a typical seasonal slowdown while commercial real estate activity picked up slightly. Employment levels were unchanged, on balance. Prices grew moderately in recent weeks.

Labor Markets

Employment in the Fifth District, on net, was unchanged in the most recent period. Some contacts continued to report challenges with labor availability. For example, an engineering consultant commented that they would hire five employees right now if they could find qualified candidates. Despite some labor availability issues, contacts generally expected wage increases to return to normal in the coming year. A pet groomer planned to scale back employee benefits to realign total direct labor costs to pre-pandemic levels. A technology-focused recruiter remarked that several candidates were not able to land a job due to outdated skills and/or AI has led to fewer job openings in their fields. For many of these workers, they expect the candidates will need to accept lower wages to find work.

Prices

On balance, year-over-year prices grew at a moderate rate. According to our most recent surveys, prices received by nonmanufacturing firms grew moderately while manufacturing firms continued to report modest price growth just below two percent. Firms' expectations for price growth a year from now increased. Manufacturers expected prices to rise at a faster rate a year from now compared to nonmanufacturers, with several citing tariffs on inputs as a reason for higher expected price growth in the future.

Manufacturing

Manufacturing activity in the Fifth District declined slightly in the most recent reporting period. Several contacts reported declines in new orders due to consumer pushback on prices. A premium wine manufacturer reported that consumers were opting for less expensive brands. A textile manufacturer relayed that customers reduced spending on big-ticket items despite inflation receding, noting that price levels were up considerably compared to 2019. A boat manufacturer cited high borrowing rates and consumer spending squeezes leading to declines in new sales. A few contacts reported increases in new orders, especially in areas with growing populations. A North Carolina based cabinet manufacturer reported increased new orders due to needs for new office space.

Ports and Transportation

Recent reports on import cargo volumes varied across the Fifth District with some ports seeing slight increases and others reporting slight decreases. Imports of assembled vehicles dropped by almost half at one port while another port saw a moderate increase in auto parts. Multiple ports noted a significant decrease in paper waste products exported to East Asia. Ports attributed lackluster cargo volumes to US big-box retailers cautiously rerouting to the West Coast in advance of disruptions if contract negotiations with the International Longshoreman Association are not settled in January. Some customers have begun repositioning empty containers and rail cargo to the West Coast at extra cost. Ports also described a weakening demand environment pushing spot prices down even from Asia to the West Coast. The rising cost of union and non-union labor is a significant concern for ports. One port implemented an eight percent labor surcharge on their base rate with increases expected in the new year, while others have introduced new incentive structures for their non-union employees.

Trucking contacts noted flat volumes this cycle and disappointing retail peak which continued what they described as a persistent freight recession this year. A larger firm cited difficulty in balancing the risk of losing market share over small price increases on contracts. The same firm also shared that skyrocketing insurance premiums led them to take on more financial risk and quadruple their deductible.

Retail, Travel, and Tourism

Consumer spending grew moderately in recent weeks. Retailers reported increases in sales and shopper traffic during the holiday shopping season. Many retail businesses expressed concerns about the next several months due to uncertainties around a potential port worker strike and tariffs affecting their ability to get products and the prices they will have to pay for them. A couple of businesses serving the District of Columbia market said that they could see an increase in sales and activity in the coming months if more government workers return to working in the office. Food service and hotel contacts reported a strong end of the year. Contacts in Western North Carolina, however, said that activity was much softer than usual because the area was still dealing with the aftermath of Hurricane Helene.

Real Estate and Construction

Overall, residential real estate activity slowed slightly as expected for the winter season, although agents in Virginia and South Carolina saw an increase in homes sales listed over one million dollars. Buyers continue to have no issues qualifying for loans but are challenged with limited inventory and mortgage rates. Almost every agent mentioned their optimism for 2025 and the chatter that sellers are wanting to sell. Multiple contacts, however, voiced concerns about impacts from potential policy shifts on government workers, immigration, and tariffs.

Commercial real estate activity had a slight uptick as buyers and sellers worked to close out deals before year end. Vacancy rates remained low in industrial and retail space while rate for lower-grade office space remained elevated. Multiple agents mentioned construction projects were finishing up, but that few new projects were being started because high construction costs mean that projects don't "pencil out." Agents in Virginia and Maryland noted an increase in rental rates as properties were becoming "turn-key" with virtually no concessions.

Hurricane Helene continued to impact residential and commercial real estate markets. A North Carolina agent noted Asheville is finally starting to see market activity while the areas around Boone were not. An agent in the Asheville market noted vacancies in industrial and retail were dropping as displaced business worked to reopen. Office vacancies in the area were also quickly dropping as government agencies and national engineering firms mobilize in the area.

Banking and Finance

Financial institutions continued to report a modest increase in loan demand with many noting this activity was coming from their consumer lending portfolios, including real estate and autos. Commercial lending, mainly in real estate secured loans, also saw modest increases in demand. Customers were still showing some restraint due to the current uncertain economic environment. Loan delinquency levels continued to show modest increases, with the most increases arising from consumer loan portfolios. Deposit levels continued to remain stable, however, competition for these balances appear to be easing as rates have started to lower throughout the marketplace.

Nonfinancial Services

Nonfinancial services providers reported subdued demand for their services and flat revenues. An engineering firm reported that there is a continued reluctance for clients to move forward on projects, while 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. An IT firm reported that they have been holding onto staff in hopes of an improvement in conditions, but they may have to make tough decisions if demand for their services doesn't stay the same or increase into the new year.

For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.

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Last Update: January 15, 2025