Beige Book Report: Richmond
October 18, 2023
Summary of Economic Activity
The Fifth District economy contracted slightly in recent weeks. Fifth District manufacturers reported mixed results in the most recent reporting period. Food service and office supply contacts reported steady growth in sales while furniture, appliance, and home remodeling and repair stores reporting sales declines in recent weeks. Travel and tourism activity slowed slightly in recent weeks, but air travel remained strong as business travel picked up. Nonfinancial services firms noted that demand for their services as well as revenues had remained stable. District ports remarked that demand was weak this period with not the usual seasonal rebound in volume; imports were lower year-over-year and month-over-month. Trucking firms reported that underlying demand was flat this period. Residential real estate respondents stated that the home sales were constrained by both affordability and the lack of inventory. Commercial real estate markets slowed this period; however, leasing remained strong for retail and industrial properties with rents continuing to escalate. Loan demand continued to slow this period both for commercial and consumer real estate loans. Employment grew modestly in the most recent reporting period, although finding workers with certain skills remained difficult. Price growth was unchanged this period but labor costs, on the other hand, continued to rise.
Labor Markets
Fifth District employment grew modestly in the most recent reporting period and wages increased moderately. Some firms reported that it had become more challenging to find frontline workers, while others cited ongoing shortages of skilled-trades workers such as CDL drivers. A food manufacturer couldn't attract or retain associates for jobs that require work in cold-temperature environments. A pre-planned vacation company continued to raise wages, but reported that a people shortage, not pay rates, as the main reason for not finding motorcoach drivers. Conversely, a staffing firm specializing in placing executive-level marketers reported too many candidates for the number of open roles.
Prices
Price growth remained at an elevated rate, but growth is lower compared to last year. According to our most recent surveys, growth in prices received by manufacturers was unchanged while prices received by services firms slowed marginally. Prices paid for nonlabor inputs rose slightly for manufactures but declined according to service providers. Labor costs, on the other hand, continued to rise. Several contacts noted that wage increases to recruit and retain workers had reduced their margins, as customers were pushing back on any further price increases, making it hard to pass along rising costs.
Manufacturing
Fifth District manufacturers reported mixed results in the most recent reporting period. A fabric manufacturer cited declines in demand in consumer related markets due to retailers having too much inventory. Both the manufacturer and retailer "took haircuts" on margins to clear inventories. However, a steel manufacturer reported strong demand for steel construction throughout their region. Macroeconomic factors were cited by several firms as reasons for slowdowns. For example, a gaskets manufacturer was "hunkering down" and halted hiring and capital expenditures due to fears of a potential economic downturn. A plastics coater reported smaller orders because customers had less money due to increased food and energy costs.
Ports and Transportation
Demand was weak at Fifth District ports this period due to less than the usual seasonal rebound in volume; imports were lower year-over-year and month-over-month. The decline in import volume was mainly due less consumer goods coming into the port. Exports were flat this period. Spot shipping rates have continued to decline and carriers were doing more blank sailings in recent weeks to limit capacity. Empties were still moving and containers were flowing smoothly at the ports; turn times were good and container dwell times had returned to normal. Demand for airfreight was soft this period; there was an especially sharp decline in international airfreight, both in terms of exports and imports.
Trucking firms reported that underlying demand was flat this period. However, capacity decreased due to several trucking companies shutting down. Freight rates were up slightly as existing capacity exited the market in recent weeks and customers were looking for new carriers. Trucking firms noted that they had not seen the usual seasonal uptick as companies try to more normalize their inventory and there had not been the usual sequential improvement in consumer product shipments this month. Trucking companies stated that are not having any issues hiring or retaining drivers.
Retail, Travel, and Tourism
On balance, consumer spending grew slightly this cycle, but reports varied across spending categories. For example, food service, grocery stores, and office supply stores reported steady to increasing sales while furniture, appliance, and home remodeling and repair stores saw sales decline in recent weeks. One retailer was concerned that the restart of student loan payments was going to lead to lower consumer spending going forward.
Travel and tourism activity slowed slightly in recent weeks. Contacts noted that the slowdown was partly attributable to typical seasonal slowdown; however, a contact in South Carolina added that the threat of hurricanes led to lower tourism in coastal destinations. Air travel remained strong as business travel picked up, which offset some declines in leisure travel.
Real Estate and Construction
Residential real estate respondents indicated that home sales were constrained by both affordability and the lack of inventory. The number of new listings in the Fifth District was down year-over-year. Buyer traffic declined due to frustration with elevated sales prices, lack of housing inventory and higher mortgage rates. Days on market increased slightly but remained below historic averages. Prices for homes held steady but there were some price reductions for homes that have been on the market for over 30 days. Prospective buyers were not having difficulties obtaining mortgages other than issues with affordability. Home construction costs stabilized this period but remained elevated mainly due to higher labor costs.
In the Fifth District, development and construction of commercial real estate was significantly reduced this period. The pace of construction cost increases slowed, but costs remained historically high. Availability of credit and the cost of capital were the biggest detractor from commercial real estate projects moving forward. Credit underwriting was much stricter with higher equity requirements for most commercial real estate deals. However, leasing demand in the industrial and retail sectors continued to outstrip supply and rents continued to escalate. In the office market, there has been a flight by tenants to better quality space. Net effective rents in the office segment were lower due to landlords offering more incentives and/or concessions to potential credit tenants.
Banking and Finance
Loan demand continued to slow with one respondent noting it was "anemic". This slowdown was being observed primarily in the real estate portfolios, both commercial and consumer. Increased rates and lower home inventories were noted as potential causes for this lack of demand. Home equity lines of credit continued to see increased demand with borrowers still finding this a viable lending alternative. Maintaining deposits remained a struggle with continued competition for balances across all sectors. Credit quality as well as delinquency rates remained stable, but institutions continue to monitor these indicators closely as rates continue to rise.
Nonfinancial Services
Nonfinancial service providers continued to report that demand for their services as well as revenues had remained stable. Some firms noted that their clients, as well as themselves, were still putting off large capital purchases due to uncertainty with the economy and political environment. Firms reported a loosening in the job market and found the applicant pools getting larger, but still far from historical norms. Wage pressure continued as current employees sought higher wages due to inflation and other employment opportunities available in their fields.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis