Beige Book Report: Richmond
September 7, 2022
Summary of Economic Activity
On balance, economic activity in the Fifth District slowed slightly in recent weeks. Manufacturers reported a modest pull back in new orders while supply chains improved slightly, leading to reduced backlogs and higher inventory levels. District ports and trucking companies reported slight declines in shipping volumes and shipping rates; however, volumes were still high relative to their pre-pandemic levels. Retailers reported little change in total sales, overall, with some reports of shifts and reductions in consumer demand. Similarly, travel and tourism contacts saw flat to slightly declining consumer demand. Residential real estate sales slowed moderately, leading to increases in inventory and average days on the market; however, the housing market remains historically tight. Commercial real estate held steady, overall, but there were some reports of slowing demand in the office segment and a slight reduction in construction projects. Financial institutions reported modest declines in commercial lending and residential mortgages but solid demand for auto loans, particularly for used vehicles. Nonfinancial firms saw moderate growth but remained very concerned about inflation. Employment rose strongly in recent weeks and a majority firms reported increasing wages to recruit and retain workers. Price growth picked up slightly and continued to increase robustly, year-over-year.
Labor Markets
Since the last report, the Fifth District labor market remained tight while employment grew strongly. Firms continued to report off-cycle wage increases to attract and retain workers and planned to raise wages again on their typical annual cycle. Several contacts reported reducing hours of service or turning down work because they did not have enough employees. An increasing number of contacts mentioned concerns about a possible economic downturn, but this has not slowed down their hiring and many firms expected to increase their employment in the next six months.
Prices
Since our previous report, price growth edged higher from an already robust year-over-year rate. Firms in both manufacturing and non-manufacturing sectors reported a slight uptick in the rate of price growth for their goods and services. Input price growth, on the other hand, picked up slightly for service sector firms but was flat for manufacturers. Several producers noted that supply chain issues continue to lead to volatility in the availability and prices for inputs. One manufacturer added that not only were raw material prices rising, but so were the prices they pay for business-to-business services.
Manufacturing
On balance, Fifth District manufacturers reported modest declines in new orders. Some survey contacts reported improving, but still strained, supply chains as order backlogs and vendor lead times both decreased. Some manufacturers reported higher inventories, which many attributed to a varying combination of a pullback in demand and improving supply chains. Firms also reported that the cost of raw materials and energy prices remained elevated, although some noted that prices have eased somewhat from their recent peaks. Contacts continued to report difficulty finding workers with job-specific skills but had less trouble hiring office workers.
Ports and Transportation
Fifth District ports indicated that shipping volumes weakened slightly this period. Imports again outpaced exports but there was some improvement in loaded exports. There was a steady volume of empties leaving the ports, allowing for reduced container congestion. However, there continued to be higher than normal dwell times of imports at the ports mainly due to chassis and warehouse constraints. Import volumes at Fifth District ports continued to be led by furniture and construction equipment. Spot shipping rates maintained their decline but were still above their 2019 levels. Air freight volume decreased this period partially due to carriers taking planes out of service for routine maintenance. Air freight rates remained elevated despite slightly lower fuel costs.
Trucking companies stated that demand had slowed and the number of booked orders had decreased, but that they were not struggling to find loads as customers were still having issues with supply-chain inventory backlogs. Respondents indicated that there was expanding truckload capacity with spot rates down 30 percent since spring; though, less-than-truckload shipping rates remained unchanged. Most firms reported an improvement in hiring drivers. Trucking companies noted continued challenges obtaining parts to maintain their equipment, causing equipment to be out-of-service for longer periods.
Retail, Travel, and Tourism
On balance, retailers reported little to no change in revenues and a slight softening of consumer demand in recent weeks. A few contacts in the fast casual food service industry reported steady sales and demand but saw more consumers shifting away from in-person ordering to third party delivery services. A furniture company said that they were still rebuilding their inventory but were seeing less demand due to price increases. Auto dealers continued to report low inventory levels, low sales volumes, and some hesitancies by consumers due to high vehicle costs and higher interest rates for auto loans.
Travel and tourism contacts reported steady to slightly lower revenues and demand. Hotels in the Fifth District gave mixed reports. A hotel in South Carolina said that occupancy in July was down from June but that was typical, and compared to last June occupancy was up. In contrast, a hotel in North Carolina saw occupancy rates lower this July than last year, which was the first time this year that occupancy was down compared to the same month last year. However, their average revenue per room was reportedly up and future booking remained strong. Business air travel reportedly picked up and a port contact reported strong demand for leisure cruises.
Real Estate and Construction
Residential real estate market activity declined moderately this period. Respondents indicated that sales volumes were slightly lower and there was a reduction in buyer traffic. Inventories of homes for sale and days on market increased while home prices have softened. Demand remained strong but it was noted that affordability was an issue as some buyers no longer qualified to purchase a house due to elevated home prices coupled with increasing mortgage rates. Existing new home construction continued but new housing starts were down; some input costs declined this period, like lumber, but on the whole residential construction costs remained elevated.
Commercial real estate activity remained stable. Some respondents noted that office and retail market activity was starting to slow while the industrial or multifamily segments continued to experience strong leasing demand, low vacancy rates, and increasing rental rates. There remained a shortage of Class A office space, especially in suburban markets, and the amount of sublease space had been shrinking. Retail vacancy rates continued to edge down; but less desirable retail centers were still struggling with vacancies. New commercial construction projects decreased slightly due to higher construction costs, lack of availability of some materials, and increased interest rates. Commercial real estate capital market activity softened this period.
Banking and Finance
Loan demand continued to slow modestly across all commercial loan types, with this being attributed to both rising rates and economic uncertainty. Residential mortgage demand continued to slow as well, also attributed to rising interest rates. Auto loan demand, especially used autos, remained stable as rising interest rates did not restrict demand. Deposit growth was flat despite institutions noting they had started to increase rates. Overall loan quality remained good, but some respondents noted delinquency rates were starting to move slightly upward, mainly in their consumer portfolio. Borrower credit quality remained good with no signs of deterioration.
Nonfinancial Services
Nonfinancial service providers continued to report moderate growth and stable demand. Contacts were still concerned that their increased costs could slow growth and negatively impact employment. Several firms noted the lack of labor and supply chain issues were still impacting their ability to expand. They continue to find creative ways to attract and maintain their employee base, but this was seen as a temporary fix. One firm noted they are observing a reduction in consumer spending and visits to entertainment districts in their area. Inflation in all areas of their businesses was a top concern of many firms.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis