Beige Book Report: Richmond
October 19, 2022
Summary of Economic Activity
Economic activity in the Fifth District was little changed, on balance, with varied reports of growth across sectors. Manufacturing activity was unchanged as new orders softened, allowing producers to work through their backlogs. District ports saw strong activity, partially due to ships being diverted from West Coast ports. Trucking companies, on the other hand, reported a decline in demand leading to increased capacity and lower spot rates. Retail spending rose modestly although there were some reports that customers were pulling back spending on nonessential goods. Travel and tourism declined slightly, on balance, as leisure travel experienced a typical seasonal slowdown while business travel picked up. Residential real estate activity slowed, and inventories remained very low. Commercial real estate activity also slowed overall despite continued growth in the industrial and multifamily segments. Loan demand softened modestly although demand for auto loans held up. Nonfinancial services reported mild but flattening growth and continued to report labor challenges, leading some to look to invest in labor saving technology. Overall, employment grew moderately since our last report and firms continued to report challenges finding workers. Wage growth continued but some firms said they were nearing the top of what they could raise wages to while others looked to incentive programs to retain workers. Prices continued to grow strongly on a year-over-year basis but price growth eased slightly off recent peaks.
Labor Markets
Since the last report, the Fifth District labor market remained tight while employment grew moderately. Firms were worried that the lack of labor was impacting their customer experience. A quick service restaurant reported service interruptions in food deliveries, trash collection, and landscaping. Additionally, some firms reported reaching a ceiling on wage increases to attract and retain workers. One firm implemented productivity incentives to retain workers that could pay out up to $36,000 a year. High school and college students returning to school has been especially impactful this year. One firm reported losing 40-50% of its workforce when the high school opened, further straining their ability to maintain consistent hours of operation.
Prices
Prices continued to rise strongly in recent weeks albeit at a slightly slower pace of growth compared to recent months. According to our most recent surveys, manufacturers reported robust year-over-year increases in prices received from customers, but growth eased somewhat from the peak set a few months ago. Likewise, service providers continued to report strong year-over-year price growth and a slight easing from the peak in August. Firms in both sectors saw a moderation in input price growth with several contacts noting that freight and energy prices have come down somewhat in recent weeks.
Manufacturing
Fifth District manufacturing activity was unchanged this period. Overall, the lack of qualified workers continued to be a significant issue for manufacturers. Survey contacts reported high labor turnover as employees often switch back-and-forth between companies depending on who is paying more. The supply chain was showing some improvements as shipments were up and backlogs have improved. Manufactures were able to clear backlogs as the volume of new orders decreased. Manufactures, especially in retail, reported pessimism about future economic conditions as they expect consumers to pull-back somewhat on discretionary spending.
Ports and Transportation
Fifth District ports indicated that demand was strong this period due to ship diversions related to continued labor negotiations at West Coast ports. Imports again outpaced exports with some improvement in loaded exports; however, exports of commodities and rolling stock trended lower. Import volumes at the ports continued to be led by heavy equipment and furniture. There was higher than normal dwell time of containers due to inland constraints. Spot shipping rates continued to decline as carriers had some freed-up capacity. Air freight volumes remained low due to reduced overall capacity and rates also declined slightly this period.
Trucking companies indicated that demand slowed, and capacity had loosened up slightly. Spot market rates decreased moderately this period, but contract rates remained the same or increased slightly. Several contacts stated that they felt like they no longer had an ability to raise rates with their customers. Trucking firms reported that they were not having trouble hiring or retaining drivers, but still had an issue getting parts to maintain existing fleet and that the cost of parts had increased dramatically. Delivery of new equipment was delayed as manufacturers continued having difficulty completing orders due to supply chain disruptions.
Retail, Travel, and Tourism
Retailers in the Fifth District saw modest growth in sales and revenue in recent weeks despite lower foot traffic. Although total retail sales were up, several contacts noted that big ticket sales were down slightly. There were a few reports that consumers were pulling back spending on nonessential goods like artwork, home décor, and higher-end beauty and wellness products. A small consumer appliance producer said that sales were down slightly compared to previous months but were still very strong compared to pre-pandemic levels. Overall, inventories declined modestly.
Travel and tourism declined slightly, overall. Leisure travel declined modestly, however business travel reportedly picked up. A hotelier in South Carolina said that the decline in leisure travel was typical for the time of year, but revenue remained strong because average room rates were up compared to last year. Several food service contacts reported mild sales declines in recent weeks. One restaurant group added that they were struggling to maintain their typical hours due to staffing challenges.
Real Estate and Construction
Respondents indicated that as interest rates rose, market activity for housing decreased while housing inventory for sale, both new and existing, were at all-time lows. In the last month, both closed and pending sales were down and sales prices had decreased modestly. Conversely, demand remained strong in some urban markets that had strong job growth. There were no issues with buyers qualifying for mortgages, but more buyers again were considering adjustable-rate mortgages. In terms of residential construction, sales decreased dramatically this period; some builders were now offering incentives, price reductions and free upgrades to sell existing new home inventory.
Commercial real estate activity market activity slowed this period with weakening demand except in the industrial and multifamily segments, which continued to experience strong leasing demand, low vacancy rates, and increasing rental rates. Market activity for Class A office space, especially in suburban markets, remains strong with rental rates unchanged. Retail vacancy rates were good, but issues around high construction costs had put a constraint on new projects. Capital market activity diminished, and sale prices declined due to increased capitalization rates. Overall, new commercial real estate construction continued to suffer from supply chain disruptions for materials and difficulty finding skill workers.
Banking and Finance
Loan demand weakened modestly across all commercial loan types, with interest rates and cash flow concerns driving demand lower. Residential mortgage demand continued to drop due to rising rates. Auto loan demand, especially used autos, remained stable with inventory issues still plaguing the new car market. Deposit growth was slowing with some respondents noting inflationary pressures on depositors driving this trend. Some institutions continued to note that delinquency rates were still moving upward, although at a measured pace, and mainly in the consumer portfolio. Loan quality continued to be stable with no changes noted by institutions.
Nonfinancial Services
Nonfinancial service providers were starting to report flattening growth and demand. Contacts continued to note that increasing costs and finding employees are major concerns to their firms. One respondent noted that they are investing more in capital expenditures and business processes to combat these trends. Firms also mentioned rising wages continued to be a challenge to both hiring and retaining employees. Some firms were resorting to non-traditional compensation schemes to remain competitive as well. Rising interest rates and inflation pressures continued to be a top focus of respondents.
For more information about District economic conditions visit: www.richmondfed.org/research/data_analysis