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Beige Book Report: Richmond
June 1, 2022
Summary of Economic Activity
Since our previous report, the regional economy grew at a modest rate. Manufacturing activity increased at a modest to moderate rate as producers continued to face challenges meeting demand due to supply chain disruptions and labor shortages. Fifth District ports reported an increase in loaded exports but a slight decline in imports, although import volumes remained historically high. Similarly, trucking demand eased slightly but remained strong relative to prior years. Retail sales remained strong while new vehicle sales remained low due to low inventory levels. Leisure travel held strong with some increases noted for group travel, weddings, and small events. Residential real estate activity slowed modestly, and some potential buyers were getting priced out of the market as interest rates and home prices rose. Meanwhile, commercial real estate activity remained strong, particularly for Class A office and industrial space. Financial institutions reported a slight slowdown in lending across most loan types, one exception being used vehicle lending, which continued to grow. Nonfinancial service firms saw moderate growth in sales but expressed some concerns that inflation could hamper growth in coming months if it remains elevated. Employment increased modestly and wage growth remained moderate, overall, as many employers continued to cite challenges finding and retaining workers. Price growth remained robust in recent weeks.
Employment in the Fifth District increased modestly amid ongoing reports of worker shortages and high turnover. A majority of contacts continued to cite difficulties finding and retaining workers across all skill levels. Among the small number of contacts reporting improving worker availability, most said that improvements came after raising wages. Additionally, one contact said that they recently made a change to their payroll policy that allowed hourly, part-time employees to be paid in a much shorter amount of time and that helped increase interest in those positions. Overall, wages increased at a moderate rate, with some reports of larger increases for highly specialized positions and for those in very short supply.
Overall, price growth remained significantly elevated in recent weeks. According to our surveys, service sector firms reported that price growth picked up from an already robust rate. Manufacturers, on the other hand, reported a slight moderation in price growth, but compared to last year, prices were still growing at a strong rate. Firms in both manufacturing and nonmanufacturing sectors continued to cite material shortages and rising fuel costs as contributors to price escalation. Labor costs also contributed to price growth as many firms continue to increase wages and benefits to recruit and retain workers.
Since our previous report, Fifth District manufacturers reported a moderate increase in shipments and a modest increase in new orders. Several contacts noted that supply chain issues and worker shortages limited their productive capacity and added to their backlogs. In response to labor challenges and continued strong demand, some companies looked to invest in automation and technology to increase production and reduce dependence on labor. A few manufacturers, however, said that demand softened slightly, which was attributed to inflation and consumers shifting spending away from durable goods.
Ports and Transportation
Overall, ports experienced continued strong container volumes, with solid growth in loaded containers and empties for export. Meanwhile, import volumes declined slightly, which relieved some of the congestion at the ports. Spot shipping rates continued to decline slightly but remained well above 2019 levels. Fifth District ports were watching for a potential summer surge in imports caused by Asian ports reopening after COVID disruptions and carriers potentially diverting ships to East Coast ahead of the West Coast longshoreman union negotiations in July. Air freight volume declined slightly while air freight rates increased this period.
Trucking companies reported that demand remained strong, but that the number of booked orders decreased despite businesses' inventory levels still being low. Capacity loosened slightly, through still tight, and spot rates declined this period; however, fuel surcharges offset much of the cost savings. Most trucking companies noted improvement in their ability to hire new drivers. Trucking firms were receiving deliveries of the new equipment they ordered in 2021, though they still had to rely on older equipment to meet demand.
Retail, Travel, and Tourism
Since our last report, retail sales remained strong with most stores able to pass on increased costs to consumers. However, labor availability continued to be a headwind for most retailers with wages increasing in order to attract and retain workers. Rising inventory and materials costs were an issue in terms of future pricing as well. With automotive manufacturers unable to maintain production due to supply chain issues, automobile dealers stated that their inventory of new cars continued to be extremely low, negatively impacting their sales revenue.
In the Fifth District, leisure travel remained strong, and contacts reported that group travel had started to come back. More weddings and smaller events occurred, but conventions have not fully returned yet. Both hotel occupancy rates and average daily rates were increased in recent weeks. Passenger counts at airports had almost fully recovered to their pre-pandemic levels despite ticket prices being far higher than in 2019. Overall, the hospitality sector continued to experience strong demand, but were still grappling with staffing shortages despite increased wages and benefits.
Real Estate and Construction
Sales and buyer traffic decreased this period compared to the first quarter of 2022 as housing inventory levels remained constrained and home prices continued to rise. Since our last report, some potential homebuyers were starting to be priced out of the market by higher interest rates combined with elevated home prices. Residential construction costs for both materials and labor continued to rise, but availability of construction materials improved. Real estate agents noted that it still was very competitive market for buyers.
Overall, commercial real estate activity remained strong this reporting period. Class A office leasing activity was robust, especially in suburban markets. Supplies of existing buildings in most commercial real estate categories were tight. Availability of industrial properties continued to be constrained due to demand outpacing supply, despite slowing absorption rates and rising rental rates. Commercial property sales were strong with lots of investment money reportedly chasing too few deals. New commercial construction was hampered by escalating costs and availability of materials, as well as shortages of skilled labor.
Banking and Finance
There continued to be strong loan demand across most commercial loan types, but there are signs of a slowing due to rising rates. Residential mortgage demand continued to slow, which was observed as a byproduct of increasing rates and rising home prices. New auto lending was still being impacted from inventory shortages, however, used auto lending demand continuing to increase. Deposits continue to trend upward, but at a slowing pace. Commercial credit quality remained good, and delinquencies remain low. Some institutions noted that consumer loan quality is beginning to weaken, and delinquencies are starting to increase slightly, especially from borrowers with limited discretionary income.
Nonfinancial service providers continued to report moderate growth in revenues and solid demand in recent weeks. Although many firms were experiencing positive growth, there was widespread concern that inflation could hamper growth in the near-term. One professional service firm said that their plans for hiring, and capital spending were put on hold because they saw their clients capping or cutting budgets out of caution. Additionally, a consultant was concerned that they might lose one of their major clients because that client was facing a contract renewal for electricity and might need to cut spending to offset increased costs of energy.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis