Federal Reserve Bank of Richmond
Summary of Economic Activity
The Fifth District economy continued to grow at a moderate pace this cycle. Consumer spending grew moderately, and consumers continued to make tradeoffs in response to higher fuel prices. Spending on travel and tourism increased with hotels in our region noting strong occupancy rates. Manufacturing activity was flat, on balance, as some sectors reported strong growth that was offset by weakness in other sectors. Nonfinancial services providers continued to report modest growth in revenue and demand while financial services firms reported no changes this cycle. Residential real estate picked up slightly while commercial construction continued to slow. Employment and wages grew moderately. Price growth remained at a modest year-over-year rate.
Labor Markets
Employment in the Fifth District increased slightly in the recent period. While many firms were able to find the talent they needed, some firms faced challenges with candidate pools. For example, an oil and gas pipeline company cited a shortage of candidates with the right acumen, while a trucking company struggled to find drivers who could pass vetting standards. In contrast, a janitorial company noted an oversupply of overqualified candidates seeking quick income. Retention also posed challenges for some, such as a lighting manufacturer that faced 40 percent attrition among new hires. A compressor producer braced for a wave of upcoming retirements as its workforce ages. Wages continued to rise moderately due in part to new minimum wage laws and the need to attract skilled workers.
Prices
Price growth year-over-year continued to rise moderately. Our most recent surveys showed both service sector firms' price growth and non-labor input costs remained unchanged at moderately elevated rates. Manufacturing firms reported a pickup in non-labor costs pushing input price growth back to just above 7 percent. Prices received by manufacturers remained relatively unchanged. Across the District and within all sectors, survey participants noted the continued pressures with oil prices.
Manufacturing
Manufacturing activity was unchanged, on net, in the recent period. Business expansion was concentrated in high-growth sectors and regions. A panel manufacturer expanded into a second facility to meet data center customer demand, while a filter producer reported spikes in orders from aerospace clients. A Carolina-based cabinetmaker reported strong commercial growth tied to regional population growth. Contacts reporting weaker sales cited several factors. A poultry producer cited both the lettuce recall leading restaurants to pull back on orders and the increase in GLP-1 usage was shifting consumer preferences. Other manufacturers pointed to geopolitics, tariffs, and rising fuel prices as ongoing challenges for their business. Labor remained a challenge, with manufacturers reporting difficulty finding workers and don't expect improvements soon.
Ports and Transportation
Overall volumes at Fifth District ports were slightly up this cycle with positive demand for imports like food and beverage commodities, autos, flooring, forged metals, and other materials used in data center construction. Agricultural and lumber shipments to China continued to bolster export volumes. Ocean freight rates continued to rise week after week with spot rates up 200 percent to the East Coast since February. Contacts attributed the rate increases to capacity constraints, energy costs, repeated weather events impacting overseas ports, and an underestimation of the continued strength of U.S. cargo demand. Reduced industry capacity and rising fuel costs have maintained upward pressure on trucking rates as well, but carriers said it has been hard to make a profit when diesel prices accelerated after they negotiate contract rates. In order to cover the fuel cost increases out of pocket, trucking contacts noted that some carriers have dipped into savings or shifted spending from fleet maintenance, and others have halted purchases of new, fuel-efficient trucks that would have improved costs and emissions in the long run.
Retail, Travel, and Tourism
Overall, retailers noted moderate demand this cycle with some higher growth reported by seasonal businesses and retailers that ran successful discounting campaigns. Many consumer-facing firms emphasized that customer budgets have been impacted by fuel prices. Some smaller businesses reported revenue declines due to increased input costs from tariffs, insurance and labor costs. Fuel prices have also heavily cut into profits. A regional grocery chain noted that with diesel prices rising thirty percent since last year, they now pay more to transport a head of lettuce from California than the cost of the lettuce itself. At the same time, the grocer noted extreme customer price sensitivity and an inability to pass along those rising transportation costs. Hotel occupancy levels across the District continued to benefit from a post-Covid shift to spending on experiences.
Real Estate and Construction
Residential real estate saw renewed activity post-Labor Day, with steady traffic despite ongoing uncertainty. Brokers noted increased concessions in both new and resale homes with buyers willing to pay asking price if sellers cover closing costs or buy down the mortgage interest rate. A North Carolina broker observed that higher interest rates primarily affected the workforce, while stock market performance impacted retirement markets. Construction remained strong in certain pockets, though builders cited challenges with materials tied to data center demand. They noted they could pass these costs to buyers as long as they were transparent about the price increases being genuine.
Commercial real estate continued its slow pace into fall. Brokers across the Fifth District reported more sellers entering the market. In Maryland and Virginia, suburban office markets continued outperforming urban ones. Industrial contacts expressed ongoing concern over data center moratoriums. Several contacts noted that economic uncertainty has kept buyers hesitant to commit, causing longer deal timelines, with one contact noting that: "time ultimately kills deals."
Banking and Finance
Loan demand remained stable for both consumer and commercial loan products. One institution observed that commercial borrowers were paying closer attention to financing costs and the return on any new business investment. A credit union noted that demand for home equity lines of credit remained strong with utilization rates also remaining steady. An almost universal observation from respondents was that competition for core deposits remained strong with institutions struggling to grow their balances. Institutions noted past due loan levels are slightly elevated from historically low levels, and delinquency rates have remained steady.
Nonfinancial Services
Nonfinancial service providers continued to report modest growth in revenue and demand for their services, however economic uncertainty remained a challenge to their firms. A recruiting firm noted that they have demand for their services, but clients were moving "slower than normal" to fill open positions. An architectural firm observed that work they have won will not start or will be very slow to start, indicating a "wait and see" attitude from their clients. A marketing firm indicated that clients were being more strategic and conservative with their spending, looking for immediate value and return on their investment.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.