April 20, 2022
Summary of Economic Activity
The regional economy continued to grow moderately amid ongoing supply chain issues, shortages of labor, and rising prices; however, several contacts expressed concerns that increasing energy costs and the war in Ukraine posed risks to near-term business conditions. Manufacturers reported moderate growth in shipments and orders but continued to face inventory and supply chain challenges. Import volumes grew strongly and ports worked at full capacity but struggled to get containers out of the port due to transportation shortages. Trucking companies confirmed the difficulties at the ports, reporting robust demand but limited availability of equipment and drivers. Retailers reported strong demand and were largely able to pass along rising prices to customers. Auto sales remained constrained by low inventory levels of new vehicles. Leisure travel and tourism was strong while business travel started to pick back up but remained well below pre-pandemic levels. Demand for homes remained strong and low inventory levels persisted. Commercial real estate activity was robust, particularly in the industrial and multifamily sectors. Bank lending was also strong, largely driven by commercial activity. Nonfinancial services firms saw moderate growth as the decline in COVID cases and easing of restrictions helped improve business conditions. Employment rose moderately but demand for workers continued to exceed supply, leading to further wage increases to recruit and retain staff. Prices continued to increase strongly due in part to rising fuel and transportation costs in recent weeks.
Labor Markets
Total employment in the Fifth District rose moderately since our previous report. Firms across a wide variety of industries continued to report labor shortages with many noting that it was particularly difficult to fill positions that required less than a four-year degree. Employers said that main challenges were applicants not having the skills or experience required or applicants dropping out during the hiring process. Some firms saw applicants turn down job offers because the proposed compensation was too low, or the job was not hybrid or fully remote. This led many to increase starting wages and benefits, expand recruiting efforts, and, where possible, provide more flexible working arrangements.
Prices
Prices continued to increase at a robust rate in recent weeks. According to our surveys, service sector firms reported year-over-year price growth of more than five percent, on average. Several firms noted that recent increases in fuel prices led to higher costs of doing business, which were being passed through to customers. Manufacturers reported strong increases in non-labor input prices, due in part by scarcities of raw materials as well rising fuel and transportation costs. Firms in both goods producing and service providing sectors also cited higher labor costs contributing to their price escalation and that strong demand has allowed them to pass costs along.
Manufacturing
Manufacturers in the Fifth District saw moderate increases in shipments and new orders in recent weeks. Several producers noted that the persistence of long lead times and low inventory levels led to increased backlogs. One manufacturer, on the other hand, said that new orders had softened but production was unchanged as they worked to reduce their backlog. Some contacts noted that higher fuel and energy prices, as well as the war in Ukraine, have led to higher prices with increased uncertainty for the near-term supply chain. One contact said they were beginning to see some European suppliers shut down due to the spike in energy costs.
Ports and Transportation
Fifth District ports saw strong growth in import volumes with terminals operating at capacity. As such, there were more ships queuing up outside the port due to slower turn times caused by longer container dwell times clogging up the port. There continued to be delays getting containers out of the ports caused by shortages in inland transportation. Spot shipping rates have come off their peak, but new contract rates were much higher than last year. Imports and exports of automobiles and heavy equipment were volatile, which contacts attributed to the microchip shortage. There were also reports of increased use of air freight due to ocean shipping delays.
Trucking companies reported that demand remained strong, leading to tight capacity. Several companies noted an ability to hire new drivers, and retention also continued to be an issue. Most trucking firms were just now getting the new equipment they ordered in 2021, but they still had to rely on aging truck tractors, chassis, and trailers to meet demand. Trucking firms indicated that they continued to increase shipping rates in response to higher fuel costs, wages, and equipment prices. Respondents indicated that they expect demand for freight to remain strong for the rest of 2022.
Retail, Travel, and Tourism
Fifth District retailers continued to experience strong demand with most stores able to pass on the higher costs of goods, as well as increased labor costs, to consumers. Many retailers cited shortages of labor and inventory as constraints on growth. Auto dealers stated that the inventory of new cars continued to be extremely low. With consumers keeping cars longer, there was higher demand for services and dealerships were having trouble finding technicians despite increasing wages.
Travel and tourism in the Fifth District continued to be strong, driven primarily by leisure travel. In most markets, hotel occupancy and average daily rates both were higher in March. Convention related business was starting to pick up, and events were retuning. Passenger count at airports rose and nearly matched their 2019 levels. Restaurants experienced strong demand but staffing was still a challenge. Overall, vacation travel remained strong, despite consumer concerns over gas prices and rising costs.
Real Estate and Construction
Since our last report, demand for homes in the Fifth District remained strong with a solid amount of buyer traffic. As such, housing inventory levels remained low and home prices continued to rise. There was not enough new home construction to meet demand, and some builders were either sold out for 2022 or were doing a lottery system for completed homes. The cost of some construction components continued to increase, but availability of materials improved slightly. Real estate agents noted that it continued to be a sellers' market and very competitive for buyers.
Overall commercial real estate market activity was strong this period, especially in the multifamily and industrial sectors where demand was high, vacancy rates low and rental rates continued to increase. Class A office leasing activity picked up with tenants looking to "right-size" their space and lock-in longer term leases. Retail leasing strengthened, leading to falling vacancy rates. However, tenant improvement costs for retail and office spaces increased dramatically. Rising home prices have led to rapidly increasing multifamily rental rates. Land sales were extremely active, and prices increased across all property types. Feasibility was an issue with new commercial development due to high construction costs, the exception being for industrial and multifamily projects. Investment sales activity continued to be robust.
Banking and Finance
Respondents continue to report strong loan demand across all commercial loan types, while residential mortgage demand has started to ease. Respondents noted that while the slowdown in residential mortgages was mainly due to low housing stocks, some potential buyers were deterred by rising interest rates.. New auto lending was still being impacted from a lack of inventory, however, used auto lending demand was growing. Deposits continued to grow on pace with last year. Credit quality remained excellent, and delinquencies remained below pre-pandemic levels, but some respondents were seeing consumer loan delinquencies trending upwards.
Nonfinancial Services
Nonfinancial service firms reported moderate growth in revenues and strengthening demand in recent weeks. Several firms noted that the decline in COVID cases and the easing of COVID restrictions helped boost activity. A federal contractor, for example, said that easing made hiring and executing work easier. They also expected a boost in defense spending because of the war in Ukraine. A few service providers, however, noted increased uncertainty and risks to business conditions due to the ongoing conflict as well as from rising energy prices.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis