Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy continued to grow at a moderate rate. Consumer spending grew moderately, on balance, but consumers showed a preference towards experiential goods and services and pulled back elsewhere. Spending on travel and tourism continued to grow, most notably for higher end hotels. Manufacturing activity was flat and firms noted minimal pricing power amid rising input costs. Nonfinancial service providers continued to report modest growth in revenue and demand. Financial services firms reported no change in loan demand this cycle. Residential and commercial real estate markets experienced a typical seasonal slowdown. Employment and wages grew moderately, on balance, despite some reports of higher wage growth for specific workers. Price growth remained at a modest year-over-year rate.
Labor Markets
Employment in the Fifth District increased modestly during this period. Firms adding workers attributed the growth to increasing business demand. A West Virginia dance studio planned to hire a worker following an expansion, while a DC-based printing company and a Virginia car maintenance chain reported hiring needs driven by strong demand. The skilled labor pool remained tight. Data center construction has further strained labor availability, with contacts reporting increased competition from non-local companies pursuing data center work. A Maryland construction company implemented a 35 percent pay increase as a retention strategy. Recruiting agencies reported heightened competition for AI-leadership roles, significantly driving up compensation for these hard-to-find workers. Several firms reported efficiency gains from AI adoption, with one financial institution rethinking its approach to entry-level positions. Outside of some hard-to-fill positions, wage growth remained moderate.
Prices
Price growth stayed at a moderate year-over-year rate. In our most recent surveys, both service sector firms' price growth and non-labor input cost remained relatively the same. Manufacturing firms reported a drop in non-labor costs pushing input price growth back to just above 7 percent. Prices received by manufacturers remained relatively unchanged. Across all sectors, survey participants noted the ongoing uncertainty with increases in oil prices, tariffs, health insurance premiums and ability to pass on pricing.
Manufacturing
Manufacturing activity was unchanged in recent weeks. Several firms restructured operations due to rising costs. A perforation service company and a printer both dropped lower-margin clients to stabilize margins, while another printing firm implemented new productivity software to help manage costs. Firms struggled to pass prices through to customers. In fact, a wood producer's customers demanded price cuts following the Supreme Court tariff ruling, which was not possible due to higher input and transportation costs. A bicycle component producer could not raise prices, leading to wages being frozen and pauses in capital expenditures. However, demand increased for several firms. A textile company reported growth as customers switched to domestic products to avoid tariffs, while a plastic manufacturer saw increased orders as customers finalized delayed purchases.
Ports and Transportation
Fifth District ports saw moderate increases in cargo volumes this cycle as both loaded imports and exports surpassed expected growth. Contacts shared that tariff-related announcements continued to influence demand, with orders for heavy machinery and niche industrial supply commodities driving import strength while consumer goods like furniture continued to lag. On balance, spot rate prices have increased in tandem with demand. Fuel cost increases have put upward pressure on trucking rates, which has in turn created a notable shift toward rail for domestic freight as well as some intermodal cargo.
Retail, Travel, and Tourism
Overall consumer spending increased modestly but customers prioritized experiences and pulled back on retail goods. In particular, smaller retailers with brick and mortar stores noted negative to flat demand this period and an overall slowdown in shopper traffic. Many firms perceived increased price sensitivity from customers with additional pressure from the rising cost of gasoline. Hotels in the Fifth District saw positive growth on par with national trends for occupancy and nightly rates but performance varied widely between segments. In Virginia for instance, upscale hotels saw double digit revenue growth while economy hotels grew only modestly. An amusement park has managed cost increases by raising certain prices and reducing labor hours. The park reported flat traffic during this peak summer period but higher-income visitors drove a notable increase in per capita spend on food, beverage, and services.
Real Estate and Construction
Residential real estate experienced a delayed but typical summer slowdown. Uncertainty with the conflict in the Middle East and elevated interest rates intensified the slowdown. Buyer traffic remained flat, with brokers reporting increased handholding with client anxiety. A North Carolina broker noted buyers shifting from the $350K to $300K homes to manage higher mortgage payments. Changes in condo lending and AI appraisals added further complexity to the residential market.
Commercial real estate also slowed seasonally. Retail remained strongest across markets, with a focus on infill projects. Class A office space showed little change as flight-to-quality continues. A Maryland broker noted the suburban markets near residential and retail amenities outperformed the central business district (CBD) market. Debt maturity and receivership continued in the outdated lower-tier office space. Multi-family properties averaged four to six weeks free rent District wide. Industrial leasing and sales paused amid energy price and tariff concerns. Data center moratoriums raised alarms, particularly in the DMV area where contacts worried about a slowdown in construction and capital investments.
Banking and Finance
Financial institutions reported overall stable demand for loans in both their consumer and commercial loan portfolios. Both commercial loan and commercial real estate customers continued to borrow, with one banker observing that borrowers wanted to "get in under the wire" due to their anticipation of future interest rate movements. Individuals were still being cautious leading to no change in consumer loan demand. Competition for deposit balances remained strong. Respondents noted stabilizing loan delinquencies with no changes in the credit quality of loan applicants.
Nonfinancial Services
Nonfinancial service providers continued to report modest growth in revenue and demand for their services, however, impacts from AI and economic uncertainty were increasing challenges for both firms and their customers. One IT firm noted that they were seeing customers reorganizing and even reshaping their businesses because of the adoption of AI tools which in turn reduced the demand for their consulting services. A law firm reported that they were seeing an uptick in business that they attributed to the many data center and energy projects they are supporting.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.