Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy continued to grow at a modest rate. Consumer spending on retail, leisure activities, and travel increased modestly this cycle. Manufacturing activity picked up moderately, particularly for firms tied to data centers and defense spending; however, many producers also expressed concerns about input cost pressures coming from the rise in oil and gas prices. Financial and nonfinancial service providers saw modest growth in demand, but also noted that economic uncertainty was leading to more "cautions" behavior. Real estate markets were unchanged this cycle. Employment was also unchanged, on balance. Price growth picked up slightly but remained in a modest year-over-year range.
Labor Markets
Employment in the Fifth District was unchanged in the recent period. Some firms reported improvement in labor availability. A DC-based services company reported higher quality candidates due to recent federal workforce reductions. However, firms reliant on skilled trades labor continue to report challenges, with an architecture firm noting an inability to complete a construction project due to worker shortages. Several firms reported employees leaving for higher-paying or more stable positions. Multiple contacts reported compensation adjustments to support their employees facing increased costs of living. For example, a manufacturer provided gas bonuses to help offset increased fuel costs, while a commercial construction firm is raising salaries for its workers.
Prices
Prices growth picked up marginally this cycle but remained within a moderate year-over-year rate. Recent surveys reported that service sector firms' prices received continued to rise between three and four percent year-over-year. Service sector firms reported a spike in non-labor input costs, which rose to over five and a half percent. Manufacturing firms reported both prices received and prices paid remained relatively the same. Survey participants across all sectors noted increases in oil prices while a few noted specific tariff related increases for items like foam and steel.
Manufacturing
Manufacturing activity increased moderately in the recent period, although firms expressed significant concerns about current economic conditions. Contacts reporting growth tended to be in industries tied to data centers or defense contracting. Many firms reported increased costs due to the conflict in the Middle East. A wood manufacturer experienced price increases for chemicals while a printer reported multiple suppliers raising prices upwards of 12 percent within a three-week period. An asphalt producer noted higher trucking and material costs. Several firms in other manufacturing sectors reported weakening demand amid consumer caution. An equipment manufacturer for the plastics industry said customers were delaying capital investments due to expected oil shortages. Coffee manufacturers reported softening demand due to customers trading down to lower quality products.
Ports and Transportation
Loaded cargo volumes were mixed across the Fifth District as some maritime ports saw a slight uptick in both imports and exports while others saw a decrease since the last cycle. Despite the variation in cargo volume, blank sailings (ships skipping ports of call) increased across the board and all ports noted a significant decrease in empty container exports, signaling that carriers do not anticipate a near-term uptick in demand. While cargo volumes at Fifth District ports were not particularly affected by trade disruptions in global conflict zones, port contacts noted that skyrocketing bunker fuel costs will have a downstream effect on consumer prices and the ports themselves received notices about 30 percent price increases on diesel and lubricants used to operate machinery. One contact noted that exporters of heavy, lower-value ag commodities in the Southeast have held back product because fuel surcharges have made the value of the cargo unsustainable to ship. While spot rates increased, fuel costs have kept margins very slim for trucking firms and contacts observed a substitution shift toward short-haul rail to and from ports even though it is typically more costly than trucking.
Retail, Travel, and Tourism
Consumer spending increased modestly this cycle with an equal number of firms citing steady to increasing demand. Big-ticket sales, however, were down overall. Fifty percent of respondents indicated that they increased their prices in recent weeks, with some contacts explicitly mentioning fuel costs as a major concern for both customers and their input costs. A Fifth District fuel distributor whose price increased 125 percent in the last month warned that "everything gets to the consumer with diesel" and that was going to put upward pressure on prices. One furniture retailer noted that they were receiving fifty percent fuel surcharges on domestic freight along with tariff surcharges, which were extremely hard to pass along via retail prices. Despite rising fuel costs, hotel occupancy in high-density parts of the District saw unexpected improvement this cycle with a resurgence of not only government and business travel but leisure tourism as well.
Real Estate and Construction
Residential real estate remained the same as last cycle. Listings continued to hit the market while buyer reservations continued amid economic uncertainty and elevated interest rates. Multiple agents noted the homes that were selling were priced correctly and move in ready. A Virginia agent noted that buyers were willing to shop around for better interest rates and lender benefits. Gas prices were impacting brokers as well, with one agent saying that they raised their fees to cover their cost to show homes.
Commercial real estate activity remained unchanged. Class A office space and retail remained strong. The medical office market saw continued growth in new facilities. Manufacturing leasing and sales seemed to pause this cycle amid concerns about tariffs and energy prices. Builders in both sectors noted their concerns with oil prices potentially delaying the start of new projects. A broker in Maryland noted a retail client is pushing off re-paving their parking lot this year due to the increase in the cost for asphalt. A Virginia builder noted concerns that if diesel prices stay elevated, they would have to pass those costs onto customers.
Banking and Finance
Financial institutions reported a modest increase in overall demand for loans, primarily in their commercial real estate portfolios and pipelines. Although many businesses were being described as "cautious," they were still moving forward with projects and fulfilling immediate needs. Consumer loan demand remained stable with most activity found within the home equity line of credit portfolio. Institutions reported stable deposit balances with continued rate pressure and competition within markets to gain any increases in deposit levels. Loan delinquency rates continued to remain stable with no changes noted in the credit quality of loan applicants.
Nonfinancial Services
Nonfinancial service providers reported modest growth in revenue and demand for their services, although many continued to note that economic uncertainty still was a top concern of their customers and themselves. A human resources consulting firm reported that they have observed clients factoring this uncertainty into their businesses and have slowed hiring for new roles and projects as a result. The HR firm also noted that their own employees seemed reluctant to leave "something stable" for new opportunities. An architecture design firm noted fuel prices were starting to impact their subcontractors, and they expected if fuel prices continued to move upwards, those trade partners would pass those increases back to them.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.