Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy experienced moderate growth in recent weeks. Consumer spending grew moderately, on balance, however there were reports across all consumer income levels of trade downs and tradeoffs needing to be made. Manufacturing activity grew modestly but varied by location and industry. Producers reported rising input costs, but many held selling prices steady and absorbed the additional cost increases. Financial and nonfinancial service providers continued to report modest growth in revenue and demand. Residential real estate markets picked up recently after a delayed start to the typical peak season. Port activity picked back up to a moderate rate after experiencing a slowdown in trade activity in the previous couple of cycles. Employment grew modestly, on balance, and wages grew moderately. Price growth remained at a moderate year-over-year rate.
Labor Markets
Employment in the Fifth District increased modestly this period. Multiple firms reported being unable to operate at full capacity due to understaffing. For example, a construction company could not take on additional work due to a lack of available employees, while a recruiting firm reported increased demand from clients struggling to find and hire skilled talent. Wages increased moderately in this period, particularly among firms that needed to attract and retain workers. For example, a financial services firm raised wages and expected further increases to retain talent and a lighting manufacturer increased wages by 4 percent to keep pace with inflation. Firms expect employment and wages to continue expanding over the next few months.
Prices
Price growth remained within a moderate year-over-year rate. According to our most recent surveys, service sector firms' price growth dipped below three and a half percent year-over-year. Service sector firms reported non-labor input costs remained the same at above five and a half percent. Meanwhile, manufacturing firms reported a spike in non-labor costs pushing input price growth to just below 7 percent. Prices received by manufacturers, however, remained relatively the same. Across all sectors, survey participants continued to note the increases in oil prices and input costs, with some saying that they were looking for ways to pass those prices on but they were not sure if customers would accept them.
Manufacturing
Manufacturing activity improved modestly in the recent period. New orders growth varied by industry and location. An aerospace plating supplier and a defense contractor reported strong demand, while a commercial cabinet manufacturer in a growing North Carolina market saw stronger-than-expected new orders. Contacts reported that managing supply chains became more difficult, with longer lead times, higher costs, and reduced availability. A printing company cited diminishing paper availability, a bag manufacturer experienced sharp cost increases, and a syrup producer reported greater difficulty sourcing materials. Transportation costs increased due to higher fuel prices and trucking shortages. Multiple contacts reported absorbing cost increases rather than raising prices. Skilled-labor availability continued to be a challenge, leading some firms to increase wages to attract talent.
Ports and Transportation
Cargo volumes at Fifth District ports saw a moderate increase this cycle driven by imports from Asia and realignment of shipping routes following the volatility and capacity reduction from tariffs last year. Contacts attributed the increase to a pull forward in demand to get ahead of bottlenecks and future price increases caused by the conflict in the Middle East. Ag commodities coming by rail to the ports also increased modestly as exports to China resumed. Ocean freight rates continued to rise in response to increased demand and capacity constraints. Carriers have responded by increasing the number of vessels available for shorter distance trade routes like from Asia to the East Coast. Trucking firms noted that while cargo volume has remained the same, regulatory enforcement has created consolidation in the industry and nudged demand toward licensed and insured carriers. Those firms have gained some pricing power and, for the first time in industry history, trucking break-even numbers have surpassed spot rates.
Retail, Travel, and Tourism
Overall consumer spending showed moderate improvement this period with a majority of firms seeing increased demand. Still, there was notable variation across market segments that suggests consumers at all income levels are making tradeoffs. For instance, a luxury salon in Northern Virginia shared that customers are spending more on cosmetic injectables but waiting longer between hair appointments and getting fewer add-on services. Higher-end restaurants reported some growth but alcohol sales were down. A regional poultry supplier saw increased sales of premium lean proteins which they attributed to the rise in GLP1 use that necessitates a higher protein diet. But the supplier also noted an increase in sales of fresh, human-grade dog food, indicating that consumers were prioritizing spending on health-conscious choices for themselves and for their pets.
Real Estate and Construction
Residential real estate picked up moderately this cycle after experiencing delays in the start to the typical spring market stemming from bad weather and elevated borrowing rates. Although this has created a shorter peak season, listings continued to come online while days on market decreased. Multiple brokers noted, if the home was in good condition, was in an ideal location, and priced correctly to start, it would sell quickly.
Commercial real estate activity overall remained unchanged. Retail remained strong in all markets with some contacts noting reconfigurations of big box stores and malls. Class A office in most of the district was strong with multiple contacts noting downsizing footprints for better quality space. A few brokers did note they were seeing impacts of debt maturity and receivership issues in the lower-level office space. Industrial leasing and sales had a continued pause with energy price and tariff concerns. Multi-family continued to be developed in Virginia and the Carolinas with a few concerns that overbuilding was occurring in certain markets. Brokers in both residential and commercial real estate mentioned their integration of new AI programs and the cost compared to legacy software.
Banking and Finance
Financial institutions continued to report a modest increase in overall demand for loans within their commercial real estate portfolios and pipelines. Institutions were continuing to observe businesses exercising caution when it comes to new credit extensions. Consumer loan demand remained stable, with home equity lines of credit showing a modest increase in demand as homeowners tap existing equity. Deposit balances remained stable but many institutions noted an increase in competition for balances in the market. Some respondents also noted a modest increase in loan delinquencies within their consumer mortgage portfolios, with no changes noted in the credit quality of loan applicants.
Nonfinancial Services
Nonfinancial service providers continued to report modest growth in revenue and demand for their services, with many continuing to note that economic uncertainty was still a top concern of their customers and themselves. A law firm noted that the current business environment, including rising inflation and higher interest rates, had negatively impacted the demand for their services. An engineering firm also noted that scarce engineering talent and the difficulty of firms to access capital were making projects harder to "pencil" and was causing some of their clients to postpone projects.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.