Beige Book Report: Richmond
July 13, 2022
Summary of Economic Activity
Since our previous report, the regional economy continued to expand modestly, although there were emerging signs of softening demand. Manufacturers reported declines in shipments and new orders; at the same time, they continued to struggle with supply chain disruptions, labor shortages, and rising costs. Fifth District ports continued to report that imports outpaced exports. Meanwhile, trucking firms reported some easing of freight conditions and a modest increase in labor availability. Retailers reported some reduced demand for their goods, although sourcing remained difficult and inventories stayed low. Leisure travel, on the other hand, held strong and business travel started to come back. Real estate markets—residential and commercial—were tight, although in some residential markets, inventories of homes for sale and days on market increased from low levels. Financial institutions reported slowing in commercial loan demand, which they attributed to rising interest rates. Residential mortgage lending also slowed, but auto lending remained strong. Nonfinancial services firms generally reported moderate growth and solid demand but some expressed uncertainty about the future. Labor markets remained tight, although there was some emerging signs of improved labor availability. Price growth remained robust although, again, there were some incipient signs of slowing growth in recent weeks.
Labor Markets
The Fifth District labor market remained tight and employment grew modestly, although there was some indication of increased worker availability as fewer survey contacts reported trouble finding workers with the right skills. To attract and retain workers, firms increased wages, and looked for other ways to improve retention. Employment grew particularly in leisure and hospitality, where firms reported an increase in tourism and conference activity. Firms broadly expected employment to grow in the next six months.
Prices
Overall, price growth remained significantly elevated in recent weeks, although the growth did not steepen. Service sector firms reported increased growth in input prices, but some flattening in output price growth. Manufacturers, on the other hand, reported a moderation in input price growth, but a slight pickup in output price growth. Compared to last year, prices were still increasing at a high rate. Firms across industries continued to report that shortages of materials, rising fuel costs, and steep transportation costs contributed to price rises. Most firms continued to increase wages in an effort to recruit and retain workers.
Manufacturing
Since our previous report, Fifth District manufacturers reported a modest decline in demand, while supply chain frictions persisted. Many firms reported decreases in both shipments and new orders from last cycle, which a few firms attributed to rising consumer prices and a shift in consumption from durable goods to services. Survey contacts reported switching suppliers to improve lead times as a way to meet customer demand, but this had mixed results. Backlogs persisted while vendor lead times remained extended. Meanwhile, finished goods and raw materials inventories rose.
Ports and Transportation
Fifth District ports continued to experience record volumes, with imports far outpacing exports. There were also record numbers of empty containers leaving the ports. However, most ports reported that loaded exports fell this period, partially due to inland constraints. Inland terminals and warehouses were full, and railroads were still restricting the number of containers taken to match available terminal, warehouse, drayage, and chassis capacity. Grain and feed exports were down although the ports expect volumes to increase this summer due to the decreased supply to other countries from eastern Europe. Overall, the dwell time for containers decreased compared to the last report. Spot shipping rates continued to decline but remained well above 2019 levels. Air freight volume was down slightly this period while air freight rates increased due to higher fuel costs.
Trucking companies reported that demand remained strong, but there were signs of expanding truckload capacity. Trucking firms reported some decrease in booked orders and declining spot rates, although fuel surcharges reduced most of the cost savings. Most trucking companies indicated that drivers have become more available and turnover has decreased due to increased wages and benefits and a return of independent owner-operator drivers to freight lines. Respondents noted continued challenges sourcing new equipment and obtaining parts to service their existing fleet.
Retail, Travel, and Tourism
Since our last report, many retailers reported that sales had started to decline slightly. In addition, rising costs reduced consumer demand for products and services. Retailers noted that the supply chain has been unreliable for new inventory. Automotive dealers stated that due to production interruptions, their vehicle inventory continued to be extremely low. Additionally, demand was negatively affected by higher vehicle costs and rising interest rates. Several respondents mentioned increasing wages and benefits in order to reduce turnover and attract workers. In the Fifth District, leisure travel remained strong and contacts reported that both group and business travel had started to come back. Both hotel occupancy rates and average daily rates increased in recent weeks. Passenger counts at airports were robust, but there remained issues with flight cancellations due to lack of flight crews. Hospitality firms continued to struggle with workforce shortages despite higher wages and benefits.
Real Estate and Construction
Respondents indicated that the residential real estate market remained competitive. However, contacts reported there was a shift in market activity to slightly lower sales volumes and a reduction in buyer traffic, which they attributed to higher mortgage rates. Inventories of homes for sale and days on market increased in the last month while growth in listing prices for homes started to soften. Nonetheless, in many markets the shortage of new homes persisted, as did the slowing of new home completion due to supply chain disruptions. Potential homebuyers were being priced out of the housing market by the interest rate increases and higher home prices, particularly first-time homebuyers.
Overall, commercial real estate activity remained strong. Availability of Class A office tightened, especially in suburban markets. Retail vacancy rates continued to edge down although shopping centers that experienced higher store closures during the pandemic were still struggling. New commercial construction was hampered by a lack of availability of some materials as well as a shortage of skilled workers. Respondents noted that rising interest rates slowed sales activity with the exception of stabilized properties, especially industrial and multifamily, which continued to sell at high prices due to strong leasing demand and increasing rental rates.
Banking and Finance
Loan demand began to slow for most commercial loan types, with this easing attributed primarily to rising interest rates. Residential mortgage demand continued to slow because of higher rates and limited housing stock. Auto lending, especially used autos, continued to be strong with respondents noting very little effect on demand from higher rates or limited inventories. Deposit growth was mixed: some institutions reported slowing due to rising prices increasing consumers' need for cash, but other institutions reporting increased growth attributed to a flight to safety. Overall credit quality remained good, and delinquencies remained low. Loan quality was stable.
Nonfinancial Services
Nonfinancial service providers continued to report moderate growth and solid demand. Contacts were concerned that their increased costs could hamper growth and negatively impact employment. One employment firm noted they expect to reduce headcount by the fall because rising interest rates will force clients to reduce project spending. One professional services firm reported that recession concerns caused their clients to consider a decrease in spending. Finding employees remains a top concern of respondents. Many of them are increasing wages and benefits to reduce turnover and attract talent.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis