Beige Book Report: Richmond
March 2, 2022
Summary of Economic Activity
The regional economy grew moderately in recent weeks, but growth continued to be constrained by supply chain and transportation issues and labor shortages. Manufacturers reported a modest increase in new orders, but shipments declined slightly as production was impacted by weather, long lead times for inputs, truck and container shortages, and an increase in employee absenteeism due in part to the Omicron variant. Ports and trucking companies continued to report strong volumes but challenges meeting it because of shortages of truck drivers and transportation equipment. Retailers saw moderate growth in sales and foot traffic in recent weeks. Travel and tourism, on the other hand, declined slightly due to winter weather and the recent surge in covid cases. Residential real estate markets were little changed as demand remained strong but low inventory levels persisted. Meanwhile, commercial real estate activity picked up moderately. Industrial real estate remained the hottest sector, but sales and leasing of multifamily and office properties grew strongly this period. Bankers reported rising loan demand across all loan types, although auto and mortgage lending was constrained by the inventory shortages in those markets. Nonfinancial firms reported a modest increase in revenues but continued to struggle hiring enough workers to meet demand. Employment grew moderately, overall, but a large number of firms reported shortages of workers. In response, firms increased wages and looked to benefits and flexible arrangements to attract and retain talent. Price growth remained elevated in recent weeks.
Labor Markets
Employment continued to increase at a moderate rate in the Fifth District. Demand for labor remained strong and, for many firms, far exceeded the supply of available workers. This led firms to increase wages moderately and to offer additional benefits, including flexible working arrangements, to attract workers and to retain existing staff. Some firms noted that even after doing so, they lost employees to companies who were willing to pay higher wages or were fully remote. Some employers were willing to loosen requirements on education and experience in favor of on-the-job training to fill open positions. One employer added that advancements in technology allowed them to hire workers without a four-year degree in computer science.
Prices
Price growth slowed slightly in recent weeks but remained at an elevated rate. According to our surveys, prices received by nonmanufacturing firms were about five percent higher than last year, which was down slightly compared to the peak rate of growth reported in December of 2020. The majority of firms indicated that they were raising prices in response to rising costs of both labor and non-labor inputs, including shipping and energy. A small number of firms, however, were concerned that customers may not be willing to accept further price increases, and if costs continued to rise they would have to find a way to absorb them.
Manufacturing
Fifth District manufacturers reported a modest increase in new orders since our previous report. Firms reported a slight decline in shipments, however, which was attributed to winter weather, workforce challenges, availability of shipping containers and trucks, and delays in receiving inputs from vendors. Some of the workforce challenges were due to employees testing positive for covid during the surge of cases from the Omicron variant, while some were simply due to not having enough workers to meet an elevated level of demand. Although most manufacturers reported growth in new orders, one firm said that new orders slowed for them because some of their customers' inventory levels were back up to normal.
Ports and Transportation
Fifth District ports saw strong growth in import volumes with the terminals at capacity and containers sitting at the ports for extended times. These delays were caused by shortages in inland transportation and a scarcity of warehouse space. Loaded exports were down moderately with the exception of forest products. Spot shipping rates remained elevated, but declined slightly from their 2021 peak. Meanwhile, contract negotiations by shipping lines with cargo shippers for one-year and multiyear contracts signaled that rates were expected to be higher than in the past. There also were reports of increased air freight due to higher costs and cargo delays with ocean-going shipping.
Trucking companies in the Fifth District reported strong growth since our last report, leading to tight capacity and a continued shortage of drivers. Longer lead times and higher prices for both new truck tractors and trailers led to companies relying more heavily on prolonged use of older equipment, but this has been hampered by delays in receiving repair parts. Trucking firms indicated that they increased shipping rates in response to higher fuel costs, wages, and equipment prices.
Retail, Travel, and Tourism
Fifth District retailers reported moderate growth in demand and revenues in recent weeks. Shopper traffic increased and many stores were able to pass on the higher costs of goods as well as increased labor costs to customers. Auto dealers stated that profitability remained at historically high levels, but that the inventory of new cars continued to be extremely low. Several respondents noted that the Omicron variant led to challenges with employee absenteeism and supply chain disruptions.
Travel and tourism decreased slightly due to weather as well as concerns over the Omicron variant. Contacts noted that group and business traveled remained soft, with passenger counts at airports down since the last report. Tour operators stated that the latest Covid variant caused cancellations of booked business along with large reductions of new bookings. However, visitation was strong at outdoor venues and ski resorts. Prices at hotels were up slightly and average daily room rates have returned to 2019 levels in many places in the Fifth District. Restaurants experienced good demand but many had to limit service because of a lack of staffing.
Real Estate and Construction
Demand for Fifth District homes remained strong since our last report. Low inventory levels persisted and home prices continued to rise; it continued to be a sellers' market and very competitive for buyers. Construction costs increased and shortages of skilled trade labor and materials slowed new residential construction. Buyers were not having any difficulty obtaining mortgages and appraisal have not been an issue because of strong comparable sales.
Commercial real estate activity expanded moderately in recent weeks; however, firms continued to face challenges from higher construction costs, skilled trade labor shortages, and supply chain disruptions. Investor purchases have been robust with high demand especially for multifamily properties and office building with stabilized occupancy. The industrial segment remained very strong with low vacancy rates, escalating rental rates, increasing sale prices, and continued new construction. Multifamily rental rates have risen rapidly this period. Retail leasing strengthened, leading to falling vacancy rates. Land sales were extremely active and prices increased across all property types. Office leasing activity improved, especially for Class A space with lots of amenities, as tenants are looking to "right-size" due to an increasing hybrid workforce.
Banking and Finance
Most respondents reported that overall loan demand is beginning to increase from the last part of 2021. These increases are being seen across all loan types, including commercial real estate and business loans. One respondent attributed this to the anticipation of higher rates and the winding down of the Omicron variant. Auto and mortgage lending was still being constrained from a lack of inventory. Deposit levels increased, but at a slower pace than previously reported. Credit quality continued to be excellent, but some respondents noted a slight uptick in delinquencies mainly in their consumer portfolio.
Nonfinancial Services
Nonfinancial services firms saw a modest increase in revenues in recent weeks and several businesses said that demand was starting to pick up. One professional service firm said that being able to attend conferences again was helping boost business. Many firms continued to struggle with employee turnover and hiring difficulties, making it challenging to meet demand. One contact also noted that turnover among project managers at their clients' businesses caused disruptions to projects flows.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis