Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy continued to grow at a modest rate this cycle. Consumer spending picked up modestly, on net, despite some short-term drag from winter weather. Tourism and travel increased modestly, particularly later in the cycle as weather improved. Nonfinancial services firms saw a modest increase in demand and port activity picked back up. Residential and commercial real estate market activity, bank lending, and manufacturing activity were all unchanged this cycle. Employment grew slightly and wages grew modestly. Prices continued to rise moderately on a year-over-year basis.
Labor Markets
Employment in the Fifth District increased slightly in the recent period. However, increased uncertainty and the desire to conserve cash led some firms to reevaluate labor decisions. A fabric manufacturer was being cautious with labor investments due to customers' hesitancy to place larger orders. A motorcycle dealer reduced production to a six-day schedule to minimize costs. Some smaller firms struggled to hire and retain workers. A marketing firm lost an employee to a larger corporation offering higher pay, and a wellness spa reported difficulty hiring massage therapists because graduates choose corporate chains. Firms with greater certainty made investments and increased head count. For example, a seafood wholesaler planned to hire after strong sales and a quick-service restaurant franchisee was adding two locations and fifty new employees. Several contacts reported modest wage increases to retain talent and keep pace with inflation.
Prices
Prices grew moderately, on balance, from last cycle. Recent surveys reported that service sector firms' prices received continued to rise around three percent year-over-year. Manufacturers, however, reported an increase in price growth, with prices inching closer to five percent compared to last year. Manufacturing firms continued reporting increases in non-wage input costs, caused by tariffs in addition to the increase in oil prices. Survey participants specifically noted price increases on tungsten carbide caused by tariffs and asphalt prices caused by an increase in crude oil prices.
Manufacturing
Manufacturing activity, on net, was unchanged this cycle. Uncertainty continued to affect business operations for several firms. A compressor manufacturer reported not being able to forecast business performance due to unpredictable import costs. A fine metal manufacturer that supplies inputs for electronics and semiconductors commented that challenges maintaining international relationships made future business prospects more uncertain. Input cost volatility was particularly challenging for small businesses. Nevertheless, several contacts reported improvements in business conditions. A metal processor saw strong business growth and a cabinet manufacturer cited client budget finalizations driving new orders. A precision sheet metal fabricator experienced large growth as their largest client supplies data centers.
Ports and Transportation
Overall volumes at Fifth District maritime ports saw modest improvement this period as firms reached a natural but conservative restocking cycle coupled with a temporary, positive response to the Supreme Court's tariff decision. Contacts noted concerns about a three-year low on auto imports and skyrocketing fuel prices. While shipping costs were expected to otherwise decrease this year due to excess capacity, prices were slightly up as ocean carriers and trucking firms introduced diesel surcharges and premiums. Contacts at the ports posit that the longer the duration of the conflict in the Middle East, the greater the impact it will have on prices throughout the supply chain.
Retail, Travel, and Tourism
Consumer spending increased modestly, on net, but was somewhat tempered by winter storms early in this cycle. In their survey responses, retailers gave indication of consumer price sensitivity and lackluster discretionary spending, with a jeweler in Williamsburg, VA noting "if they can save a dollar and get free shipping, they're shopping online... it's been my worst year so far." Multiple respondents shared that tariff impacts on both raw materials and finished goods have cut into profit margins by more than 20 percent. One business commented on the continuation of higher tariff rates, saying that it was "simply unsustainable for our business." Hotel occupancy and revenue showed some improvement late in the cycle, with regions like Northern Virginia and Washington, D.C. seeing a small spike in demand for seasonal travel compared to last year.
Real Estate and Construction
Residential real estate was unchanged, on balance. Residential real estate started the cycle off with signs of a strong spring market when long-term rates dipped below 6 percent; however, increased economic uncertainty and rates tipping back over 6.5 percent have wilted buyer optimism. The number of homes for sale increased as new listings continued to come on the market. One segment of the market that was doing was doing well was for homes over one million dollars. Virginia home builders were concerned about increased land prices as land slated for data centers exceeded $4 million an acre. Builders in both residential and commercial sectors continued to criticize the burdensome government approval processes, adding to the challenge to build affordable housing.
Commercial real estate activity was unchanged this cycle. Class A office space in several metros across the Fifth District was extremely tight, opening the doors for newly renovated A- and B+ office space. Retail and industrial activity remained the same. Multi-family vacancies increased and prices declined in recent weeks. Unlike residential real estate, a Maryland agent noted that commercial real estate deals were moving forward despite a "fog of uncertainty."
Banking and Finance
Financial institutions continued to report stable loan demand. Loan pipeline growth rose modestly, mainly coming from banks' commercial portfolios. A banker observed that this pipeline increase was coming from customers moving forward on capital projects more based on need versus pursuing an expansion or upgrading equipment. A credit union noted that home equity line utilization rates were increasing while another institution saw home equity loans increasingly being used to consolidate household debt. Loan delinquency rates remained stable, but it was noted that consumer credit quality still was showing "challenges."
Nonfinancial Services
Nonfinancial service providers reported a modest increase in demand for their services; however, they continued to note a continued hesitation of their customers to move forward with new projects or make new purchases. A staffing firm noted that normally they saw their clients begin to staff up for the spring and summer, but they were not seeing that trend this year as the companies remained in a "holding pattern." A law firm observed that their clients' concerns over interest rates and general uncertainty about economic conditions were keeping them from moving forward on projects.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.