Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy continued to grow at a modest rate in recent weeks despite some weather disruptions. Reports on consumer spending on retail goods were mixed, while spending on travel and tourism increased slightly in parts of the region. Manufacturing activity continued to contract slightly due in part to winter weather disruptions to operations. Residential real estate activity was also impacted by weather, which caused a slowdown for several weeks. Meanwhile, commercial real estate activity picked up moderately. Financial and nonfinancial services revenues and demand remained steady. Employment increased slightly in recent weeks, particularly in sectors and geographic areas experiencing growth. Price growth and wage growth remained moderate.
Labor Markets
Employment in the Fifth District increased slightly in the recent period. Firms that increased employment tended to be in specific industries or in regions experiencing growth. For example, one Winchester, Virginia finance company added employees due to increased demand resulting from population growth. However, several contacts reported a shrinking labor pool affecting their ability to hire. For instance, a peanut retailer commented that they were having a hard time finding part-time labor, and a recruiting firm reported that fewer employed workers were looking to change jobs due to economic uncertainty. Finding workers with the right skills continued to be a challenge within the trades, with one auto mechanic shop providing an average wage of almost $100,000 to attract workers. However, wage growth has returned to normal levels for most firms.
Prices
Prices continued to grow moderately, on balance, from last cycle. Recent surveys reported that service sector firms' year-over-year growth in prices received was around three percent. Manufacturers, however, reported an increase in price growth, with prices up about four percent compared to last year. Manufacturing firms reported non-wage input costs continued to increase as tariff ramifications were seen in foreign and domestic pricing. Price sensitivity among customers kept some firms from raising prices to offset cost increases and led to tighter profit margins.
Manufacturing
Manufacturing activity declined slightly this cycle. Extreme cold and ice storms disrupted operations, preventing employees from reaching work and delaying shipments due to unsafe transportation conditions. New orders were mixed across industries. Contacts serving data centers and the military reported increases. For example, an electrical panel manufacturer was having a record year driven by one data center equipment customer. However, several contacts reported bifurcation within their own customer bases. A sheet metal fabricator reported strong performance among their top five customers while remaining customers were mostly purchasing less. However, multiple contacts reported decreasing demand, especially for discretionary goods. A dental implant manufacturer reported a slowdown in new orders due to patients not following through on treatment plans.
Ports and Transportation
Overall volumes at Fifth District maritime ports were down modestly since last cycle reflecting a period of sluggish demand and winter weather disruptions that impacted cargo loading and unloading. Port contacts shared that "tariffs are finally having an impact," and while the level of uncertainty has come down, businesses were closely monitoring consumer behavior and ordering only enough inventory to meet expected demand. With fewer ag exports and tempered import demand, empty containers have started to pile up. Price pressure from low volumes has impacted revenue both for carriers and the ports, causing one port to turn off some container handling equipment and reduce operator hours to save on fuel, maintenance, and labor. Trucking contacts also reported a decrease in volume this cycle and increased wait times for shipments, which one contact noted "is often aligned with a weaker economy."
Retail, Travel, and Tourism
Overall consumer spending increased slightly this cycle despite mixed reports from retailers about demand and revenues. Winter storms and ice kept customers housebound so that even a tire wholesaler in West Virginia that typically benefits from inclement weather noted impacted sales. A high-end furniture store ran a sale in January and had a good response from customers, which boosted sales before the winter storms hit. While still showing weakness compared to last year, consumer spending on travel and tourism improved slightly since last cycle. Notably, the increase in hotel revenue in Virginia was driven by upper-tier accommodations while mid- and lower-end options were little changed. Hoteliers in the Washington, DC area have seen declining demand with little expectation of improvement due to lower government travel spending.
Real Estate and Construction
Residential real estate was heavily impacted by weather this cycle. Snow and ice throughout the Fifth District caused a multi-week slowdown in activity. Although temperatures were cold, brokers in the District believed the resale market was heating up as more listings came online and home prices stabilized. Home builders were less optimistic with one saying that "overall consumer confidence and consumer sentiment is having an impact on buyers' desire to move." In addition, housing projects were being completed but new starts were slowing down. A Maryland builder noted "Builders don't want to get caught speculatively building and not be able to sell."
Commercial real estate activity increased moderately as brokers noted a "burst" and "resurgence" in activity this cycle. Class A office space was filling up throughout the Fifth District while the gap between lower quality office buildings grew. Retail space in the District was coming into a balanced market. Brokers in both Virginia and North Carolina noted industrial spaces were selling but they were finding it harder to lease. Overall, lease terms in all sectors were seeing concessions of free rents outweighing the cost of tenant improvements.
Banking and Finance
Financial institutions continued to report stable loan demand as one banker observed borrowers starting to "move off of the sidelines" even though slight headwinds existed in project costs. Loan demand still was primarily concentrated in commercial loan portfolios with some modest upward movement in demand for residential mortgages to start the year. Deposit levels continued to be stable with some institutions noting modest seasonal increases. Institutions noted, with a cautious optimism, a stable level of loan delinquencies, mainly in the consumer portfolio. However, consumer creditworthiness was still showing "challenges" as they apply for new credit.
Nonfinancial Services
Nonfinancial service providers continued to report stable demand for their services, although economic uncertainty continued to present a challenge for customers. A design firm noted that clients were moving forward with plans despite concerns about economic uncertainty. Severe weather was noted by several firms throughout the Fifth District as having slowed some projects from moving forward. One consulting firm noted the weather had created a "dampening psychological" effect on borrowers. Rising costs continued to be a concern as an IT firm specifically mentioned escalating health and liability insurance premiums as something they were watching closely.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.