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Beige Book Report: Richmond
January 12, 2022
Summary of Economic Activity
The Fifth District economy grew modestly since our previous report, but growth was somewhat constrained by supply issues and labor shortages. Manufacturers reported a moderate increase in shipments, new orders, and backlogs while inventory levels remained low as supply shortages persisted. Ports continued to see record-breaking volumes, particularly for imports. Trucking companies experienced strong demand and did not see the typical seasonal slowdown for this time of year. Retailers reported strong demand, increased foot traffic, and sales levels on par with 2019. Travel and tourism remained strong, driven by leisure travel as hotel occupancy rose, although hotels had to limit the number of rooms or services due to staffing shortages. Demand for residential real estate remained strong but declined slightly in recent weeks. Home prices were little changed and inventories remained low. Commercial real estate activity increased moderately. The industrial market remained strong while office and retail leasing activity improved. Banks reported a slight decline in loan demand as a result of the softening in mortgage activity and concerns from businesses over the rise in Covid cases from the Omicron variant. However, commercial and business lending held steady. Nonfinancial services generally experienced flat to modestly increasing revenues in recent weeks. Employment rose moderately and demand for workers remained strong, but companies continued to report challenges filling open positions. Some employers were concerned that rise in Omicron cases would add to their labor challenges. Wages rose strongly as many employers gave larger than usual year-end increases. Prices grew robustly as firms increases prices in response to higher costs of goods and labor.
Employment and Wages
Employment in the Fifth District increased moderately since our previous report. Demand for workers remained robust with many firms reporting unfilled job openings and difficulties finding qualified candidates. Several contacts noted that their employees were getting unsolicited job offers from other companies. The tight supply of labor led some companies to look to investment in technology and automation so they could operate with a smaller headcount. A few employers expressed concerns that the Omicron variant of Covid-19 would add to labor challenges as more employees may be required to quarantine. Wages increased strongly with many contacts reporting higher than usual year-end wage increases. Several noted that those increases were in addition to off-cycle wage increases already made this year to attract and retain workers.
Price growth increased further in recent weeks from an already elevated rate. According to our surveys, average prices received by services firms was up by more than six percent compared to last year. Firms reported even stronger growth in non-labor input prices. Additionally, many firms reported raising wages and passing the higher labor costs through to final prices. Manufacturers also reported strong growth in prices paid and received, with some of the largest cost increases coming from freight and energy.
Fifth District manufacturers experienced a moderate increase in shipments and new orders since our previous report. Capacity utilization increased, but the higher volume of new orders led to increased backlogs. Low levels of inventories of raw materials and finished goods persisted. Lead times continued to lengthen for many components, including microchips, but a few producers saw lead times ease slightly for some materials. Several manufacturers anticipated supply chain disruptions to extend at least into the second half of 2022. Spending on equipment and software picked up modestly in recent weeks.
Ports and Transportation
Fifth District ports reported strong growth and record-breaking volumes since our last report. Import volumes drove growth, with export volumes down slightly with the exception of farm equipment. Several respondents reported receiving diversion from other east coast ports due to congestion or carriers skipping ports due to time and cost concerns. Shipping prices remained high but have come down from their peak earlier in the year. Most ports stated they are running at or over capacity, with no additions to U.S. container capacity expected until at least 2023. Shortage of transportation equipment and warehouse space caused imports to sit at rail yards and ports for longer periods. All the ports indicated that cost for both labor and equipment were rising rapidly. One airport noted that both passenger and air freight traffic were up this holiday season.
Trucking firms in the Fifth District cited unusually strong demand for shipping for this time of year. Volumes were high across most goods in both the industrial and retail sectors. Contacts reported turning away business because of shortages of drivers and equipment. Trucking firms indicated that employment and equipment costs have continued to increase and they have been able to pass them along customers.
Retail, Travel, and Tourism
Retail demand in the Fifth District was strong since our last report. Customer traffic increased and retailers were on track to meet 2019 sales levels. Retailers passed on the higher costs of goods, mainly owing to elevated freight costs, as well as higher labor costs. Auto dealers saw strong revenue because of high prices of used vehicles and increased demand for servicing of existing cars, but new car sales were down because of low inventory levels.
Fifth District travel and tourism held strong primarily due to leisure travel. Contacts noted that there has been a limited amount of group or business travel, as well as fewer conferences or conventions. Passenger counts at airports are at their highest since the beginning of the pandemic. Hotel occupancy and room rates strengthened, but hotels are holding back rooms or limiting service because of staff shortages. Restaurants saw strong demand but had to limit hours or days of service because of lack of staffing, and reducing menu choices because of supply chain disruptions.
Real Estate and Construction
Demand for Fifth District homes has experienced some seasonal slowing since our last report but remained strong. Average days on the market increased slightly, but remains short amid low inventory levels. Home prices remained elevated, discouraging some purchasers, but buyers did not have any difficulty qualifying or obtaining mortgages. Rising construction costs, long lead times for materials and equipment and shortages of skilled trade labor continued to slow residential construction and limited the availability of new homes.
Overall, activity in the commercial real estate market continued to increase at a moderate rate in the Fifth District. The industrial segment remained very strong with low vacancy rates and rising sale prices and rental rates. Office leasing improved slightly, but tenants were still doing short term lease renewals amid some indecision by companies as to future space requirements. The owner-occupied real estate market was strong as more businesses have decided to own their space. Retail leasing was good with lots of renewals and new tenants. Multifamily leasing remained robust with rising rents. Contacts also reported increased multifamily construction in their markets.
Banking and Finance
Overall loan demand slowed slightly, mainly due to usual seasonality as well as new Covid concerns from the Omicron variant. However, commercial real estate and business lending remained steady. Mortgage lending was down slightly and one respondent noted that the supply of homes was keeping the loan volume depressed. Direct auto lending was still being impacted from a lack of car dealer inventory. Financial institutions noted that deposit levels were still increasing modestly, even in a low-rate environment. Credit quality continued to be excellent with one bank noting their delinquency rates were at 15-year lows.
Nonfinancial services firms reported a modest increase in revenues and demand. Professional services firms experienced strong demand and steady to increasing revenues. Health services firms, however, reported flat to slightly declining revenues. One health care provider said that staffing shortages inhibited their ability to meet demand and led to falling revenues. Educational institutions reported no changes to demand or revenues in recent weeks.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis