July 12, 2023
Summary of Economic Activity
The Fifth District economy grew slightly in recent weeks. Retailers and food service companies saw steady to increasing consumer spending, particularly for seasonal goods. Auto sales, however, were down slightly and inventory levels remained very low. Travel and tourism picked up, but travel shifted more towards larger city and international travel. Nonfinancial services firms reported stable demand, but some noted that clients were holding back capital due to economic uncertainties. Manufacturing activity slowed as new orders declined. District ports echoed that sentiment and noted that imports slowed as retailers and manufacturers still had elevated inventory levels. Loaded exports, particularly agriculture products, remained strong. Trucking firms also reported lower freight volumes this cycle. Residential real estate conditions softened as activity was still being restrained by a lack of available inventory. Commercial real estate markets were mixed as retail and industrial segments remained strong but multifamily activity leveled off and office vacancy rates rose. Commercial loan demand softened while consumer loan demand was little changed. Employment picked up moderately and wage growth eased slightly but wage pressures remained elevated amid a continued tight labor market. Price growth continued to ease but remained elevated compared to pre-pandemic inflation rates.
Labor Markets
Employment grew moderately over the most recent reporting period. Businesses continued to face challenges finding workers, but those challenges were more isolated to specific industries and skill-levels. A software company reported that finding IT workers at reasonable rates has become easier. Conversely, a company that offers tour bus vacations struggled to find drivers and mechanical technicians, which was keeping them from operating at a higher level. Wage growth eased somewhat but there were some reports that wage pressures remained high. One contact, for example, reported that they were closely monitoring inflation and trying to adjust wages to ensure they were providing a living wage for their staff while remaining competitive in the market.
Prices
Price growth continued to moderate in recent weeks, particularly for services. According to our most recent surveys, prices received by manufacturers declined sharply in June, falling below four percent year-over-year growth. Services firms also saw price growth moderate slightly in June, but the annual growth rate remained just above five percent. A few businesses remarked that the increased cost of capital was driving up their expenses and they were increasing their prices as a result. However, some added that they were not able to push the full cost through to customers, so margins were tightening.
Manufacturing
Fifth District manufacturing firms reported some slowdown in business activity during the most recent reporting period. Firms reported that rising interest rates and a pullback in consumer spending on goods led to declines in new orders. A dental laboratory reported not meeting their numbers for the past six months due to a significant slowdown in the dental market. A furniture manufacturer reported that they were having layoffs for only the second time in their forty-two-year history due to declining business conditions. Several contacts reported imbalances in inventory levels as finished goods inventories were creeping upwards. This is especially true in the retail manufacturing sector as retailers pulled back on new orders.
Ports and Transportation
Fifth District ports stated that loaded import volume was down this period, but that volume was close to pre-pandemic levels. Many big retailers still have elevated inventory levels causing a decrease in imports of consumer goods. However, there was a slight increase in imports of machinery and parts. Loaded export volumes were strong mainly driven by agricultural products and lower value commodities. Spot prices remained low though still slightly higher than in 2019. Container dwell times shortened dramatically, and gate turn times were not an issue. In the last month, airfreight was soft compared to recent years but still above 2019 levels and was driven primarily by imports as exports were down drastically.
Trucking firms reported that shipping demand remained soft this period as customers were still dealing with elevated inventories and reduced orders. However, food and pharmaceuticals shipping volumes were holding up well. Spot shipping rates were at low levels as there was a lot of excess capacity in the truck load segment. However, respondents indicated that they were able to get moderate increases with their contract rates despite customers being very price sensitive. Companies stated that drivers were more readily available. Trucking firms also remarked that the higher labor costs, as well as dramatically higher costs of parts and new equipment, were impacting profitability.
Retail, Travel, and Tourism
Retailers reported steady to modest growth in sales in recent weeks. Several of the businesses that saw increased sales noted that it was partly due to typical seasonal patterns as they were geared towards summer shopping. Restaurants and novelty food services reported strong sales and steady demand. Auto sales, on the other hand, declined slightly and dealers commented that limited inventory and elevated interest rates were impeding sales volumes.
Travel and tourism increased slightly, on balance, but several contacts saw some shifts in consumer behavior. For example, travel picked up in Baltimore and Washington, D.C. while coastal areas of the district reported slightly lower occupancy and revenues in recent months; however, the expectation was for beach travel to pick up going into the summer months. An airport contact said that consumer travel was steady and saw more people taking international flights than in recent years.
Real Estate and Construction
Residential real estate respondents indicated that the inventory of homes for sale remained constrained with contract prices continuing to appreciate slightly. Overall, the number of sales decreased primarily due to the low housing inventory as well as the usual seasonal slowdown. In the last month, buyer traffic was steady and days on market continued to be low. Prospective buyers were not having any difficulties obtaining mortgages but there were some issues with appraisals not coming in at the escalated sales price. Residential construction firms noted a decrease in demand for their services as homeowners were less willing to plan for large remodeling or constructions projects.
Overall market activity in the commercial real estate sector was mixed in the last month. Leasing remained strong for retail and industrial properties with rents escalating this period. In the office market, vacancy rates and space available for sublease increased due to companies downsizing. Rental rates in the office segment remained flat; however, landlords were offering more discounts and/or concessions to potential credit tenants. In multifamily, lease rates were starting to flatten out. Respondents stated that tighter credit availability was starting to negatively impact investments into new projects. Commercial contractors noted a continued lack of skilled labor, and also that the amount of work out to bid has slowed substantially.
Banking and Finance
Loan demand slowed slightly across most loan types, most notably in the commercial real estate and business loan portfolios. This slowing of demand continued to be attributed to rising interest rates and uncertain economic conditions. Consumer loan demand remained stable, with home equity loans showing moderate growth. Some banks reported declines in deposits as customers moved funds to higher yield products. Institutions also noted a slight degrading of borrower's credit quality due to their increased costs of conducting business. Loan delinquency rates remain stable, but institutions have been closely monitoring their portfolios.
Nonfinancial Services
Nonfinancial service providers continued to report that demand for their services as well as revenues had remained stable. One respondent noted they felt demand was still being driven by a pent-up demand for commercial printing services held over from Covid. Others noted that they have observed more clients preserving capital in anticipation of economic uncertainty. Labor shortages have begun to ease in certain industries, but wage pressures remained high. Respondents also noted a renewed focus on expense control at all levels of their businesses in light of higher wages, higher interest costs, and economic uncertainty.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis