January 18, 2023
Summary of Economic Activity
On balance, the Fifth District economy continued to expand slightly in recent weeks as consumer spending grew modestly but activity in other sectors declined. Manufacturing activity softened slightly, and new orders declined. District ports reported a moderate decline in activity, particularly for loaded import volumes. Trucking activity also slowed, partially due to a typical seasonal slowdown, and spot shipping rates decreased moderately. Overall, retail spending grew moderately as strong holiday sales helped lift revenues. Travel and tourism venues also reported moderate growth. Vehicle sales, however, remained low as higher interest rates deterred purchases. Residential real estate activity also softened due to elevated mortgage rates leading to lower sales volume with more seller concessions. Commercial real estate activity slowed moderately across all market segments and some commercial construction projects were cancelled or put on hold. Lending volumes reflected the pull back in borrowing demand and some banks reported increasing delinquency rates in their consumer portfolios. Nonfinancial services reported steady demand and revenues. Total employment increased only modestly with some employers noting being more cautious about hiring and others saying they couldn't raise wages any further. Overall, prices continued to grow strongly in recent weeks; however, some input prices eased.
Labor Markets
Employment in the Fifth District increased modestly in recent weeks. A packaging firm reported that while they have not started layoffs, they have gotten much more selective in who they interview. Several contacts reported that retaining employees continued to be a major issue. One quick service restaurant stated that their company has great culture, but new hires don't stick around long enough to find out. Several contacts reported being at a breaking point on increasing wages as they cannot pass through costs anymore to consumers. Inflation has been a major drain on margins as firms raised wages multiple times to keep up with increased wage expectations for current and potential employees.
Prices
Prices continue to grow strongly in recent weeks. According to our most recent surveys, manufacturing and service sector businesses experienced robust year-over-year growth in prices received. Overall, input price growth remained strong; however, some manufacturers reported paying lower prices for freight and energy. There were several reports, on the other hand, that construction costs continued to rise reflecting higher materials prices and borrowing costs.
Manufacturing
Manufacturing activity in the Fifth District softened further in recent weeks. Shipments of finished products picked up slightly, but contacts reported a modest decline in new orders. One fabric manufacturer reported that some of their customers are reducing inventory levels due to a fear of decreased demand, resulting in a decline in orders. A furniture manufacturer saw a slowing of consumer purchases and expected this trend to continue in the next few months as fewer consumers remodel their homes. Supply chain disruptions showed signs of improvements as backlogs and vendor lead times both declined.
Ports and Transportation
Fifth District ports reported a moderate slowdown in volume this period. Loaded imports were significantly down led by a decline in retail inventory, but loaded exports were flat or slightly up. The volume of empty containers leaving the ports continued to be strong. Dwell time at the ports shortened leading to less congestion and lower storage fees. As shipping lines had some freed-up capacity, spot rates continued to decline back to pre-pandemic price levels and were significantly under current contract rates. Due in part to an earlier and longer Chinese New Year, the ports were anticipating significantly lower import volumes in the first quarter of 2023.
Trucking firms reported a usual seasonal slowdown in freight volume this period. Overall, retail shipping volumes declined slightly this period while commercial and industrial loads held up as some firms were still suffering from inventory shortages. Spot market rates decreased moderately this period and there were few increases in contract rates. Trucking firms indicated no difficulty hiring drivers and a few companies actually had scaled back hours and were not backfilling positions in response to the lower volumes. Maintenance remained an issue, which had caused trucking companies to have to maintain bigger fleets. Prices for new tractors and trailers have increased substantially and new equipment orders were back ordered about six months.
Retail, Travel, and Tourism
Retailers reported moderate growth in sales and revenues due, in part, to the holiday shopping season. A few contacts said that customers were still not as price sensitive as they would have expected and were not only interested in discounted items. One contact added that revenues were up because sales volumes were unchanged while their selling prices had increased. A car dealer said that rising interest rates have slowed vehicle sales but that was helping to get more inventory back on the lot.
Travel and tourism increased moderately in recent weeks. Hotels reported that strong occupancy levels and higher room rates led to higher revenue. A hotel in South Carolina added that bookings were up for both leisure and business travel, particularly for small and mid-sized corporate events. Some hotels continued to limit services due to labor shortages, but one contact said they were able to use contract or temporary employment agencies to fill some food service and housekeeping positions.
Real Estate and Construction
There was reduced market activity this period, partially due to usual seasonality, with a decline in the number of listings, decreased buyer traffic, and increased days on market. Respondents indicated that there were fewer closed and pending home sales as elevated mortgage rates and low housing inventory impacted volume. Sales prices have decreased modestly from their peak in the spring; however, sellers were offering more concessions to complete transactions. New home builders also were doing more discounting and/or providing incentives to sell their remaining housing inventory. New home construction costs were lower than their recent peak but still above pre-pandemic levels. There also was a significant pullback in investor activity in the single home market.
Overall commercial real estate activity slowed moderately this period with reduced construction as well as lower leasing activity, investment volume, and asset values. Additionally, as companies consolidated their office space there was an increase in sublease inventory and vacancy rates. Most new commercial construction projects have been put on hold due to elevated construction costs and higher funding rates. There was decreased demand for office and retail space particularly in central business districts. Property owners were offering bigger concessions rather than lowering asking rents on new leases for both multifamily and retail. Capital market sales activity was down significantly due to higher interest rates.
Banking and Finance
Loan demand continued to be weak across all commercial and consumer loan types. This weakness was being attributed mainly to increasing rates and borrower apprehension about the overall economy. Some institutions noticed an increase in existing credit card line usage as well as home equity lines of credit. Deposit levels continue to drop although rates were increasing in line with treasury securities. Institutions continued to see a modest increase in loan delinquencies, especially in the consumer portfolio. Overall, institutions anticipated a moderate decrease in both loans and deposits in 2023.
Nonfinancial Services
Nonfinancial service providers reported stable demand for their services as well as revenue growth. Contacts expected to moderately increase wages in the coming year to maintain and grow their workforces. One professional services firm was budgeting for technology upgrades to remain efficient during this time of workforce uncertainty. Supply chain issues were improving, but this improvement was being offset by a decrease in demand from clients. Inflation and rising interest rates were still a concern for firms' customers, which added uncertainty to making business decisions.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis