Beige Book Report: Richmond
March 8, 2023
Summary of Economic Activity
The Fifth District economy grew modestly since our previous report. Manufacturing activity was unchanged, on balance, as some segments continued to grow while others contracted. District ports reported a net decline in total volumes as import activity slowed while loaded exports picked up moderately. Trucking companies also saw a decline in total volumes leading to lower spot market rates. Retailers experienced solid growth in sales and most said that consumer confidence was strong. Travel and tourism grew moderately, and hotels reported strong growth in revenues as occupancy was solid and average room rates were up. Residential real estate activity picked up in recent weeks, but the low inventory of houses continued to restrict sales volumes. Commercial real estate activity was unchanged since our previous report. Financial institutions reported weakening loan demand and a decline in deposit levels. Nonfinancial services demand held up while revenues flattened out due to rising costs. Employment grew modestly and employers continued to struggle to find qualified workers. The pace of wage growth slowed somewhat but was still elevated, overall. Prices continued to rise strongly on a year-over-year basis.
Labor Markets
Employment grew modestly in recent weeks. Contacts continued to report significant issues with finding qualified workers. A motorcoach company cited a lack of applicants, even after offering to train candidates on how to drive their buses. An ice cream chain put expansion plans on hold so they could focus on hiring and retaining employees. Conversely, a staffing agency reported that they were able to fill numerous data mining openings, as the position attracted a good supply of quality candidates. The growth rate of wages was beginning to slow; however, wages were still above what employers were expecting to offer. An air compressor supplier reported that the wage for a replacement worker was significantly higher than the employee they were replacing.
Prices
Year-over-year price growth remained elevated, however the pace of growth eased slightly in recent months. According to our most recent surveys, prices received by manufacturers grew around six percent over the prior year, but that was down from around ten percent growth reported in November 2022. Prices received by services firms, on the other hand, remained elevated and have yet to ease significantly from their recent peak. These trends largely reflected price growth for firms' inputs, with manufacturers seeing input price growth slowing more than services firms reported.
Manufacturing
Manufacturing activity in the Fifth District was little changed in recent weeks. Sentiment about business conditions reflected the industries manufacturers serve. For instance, a steel manufacturer reported a "siloing" of demand, as growing industries – like electric vehicle plants – was making-up for declining parts of their business, like shopping centers. On balance, supply chains continued to improve as order backlogs and vendor lead times declined. Hiring was growing at a slower pace than previous periods. A cabinet manufacturer was forgoing layoffs amid expected declines in new orders, allowing attrition to naturally happen without replacing departing workers.
Ports and Transportation
Fifth District ports reported a continued slowdown in total volume this period. Loaded import containers were down, primarily for furniture and retail goods, while loaded export volumes increased moderately, led by an increase in auto parts, agricultural products, and paperboard. Rolling stock exports grew modestly this period. Spot rates for trans-Asia containers declined to below pre-pandemic pricing and were significantly under current contract rates; Transatlantic rates were slightly lower this period. With reduced import volumes, the ports were anticipating carriers doing more blank sailings and/or taking ships out of rotation in the first quarter of 2023.
Trucking firms reported a decrease in freight volume this period, and contacts indicated that capacity is no longer an issue. Some customers were seeking to bid out their existing contracts now in order to take advantage of lower freight rates. Spot market rates have decreased moderately this period. Despite higher fuel costs, a contact stated that it's hard to maintain existing rates in this environment. In the Less-than-Truckload segment, both volumes and shipping rates held steadier this period. Trucking firms indicated little difficulty retaining drivers and have been slower to backfill open positions due to the lower freight volumes.
Retail, Travel, and Tourism
Retailers reported solid growth in sales in recent weeks with several business reporting sales figures at or above pre-COVID levels. Most retailers said that consumer confidence was strong and that customers were willing to accept price increases. A grocery store, on the other hand, saw more customers trading down by buying store brands or less expensive proteins due to elevated food prices.
Travel and tourism grew moderately since our previous report. Hotels reported that 2023 was off to a good start with solid growth in bookings and average daily rates leading to strong revenue growth. A hotelier in South Carolina said that occupancy rates were slightly below pre-COVID but that was only because the inventory of hotel rooms increased at a faster rate than bookings. An airport contact said that passenger traffic was up at the start of this year but compared to pre-COVID, traffic was still down for lack of available planes and pilots.
Real Estate and Construction
Most residential real estate professionals and builders noted a surprising uptick in new home sales activity since the beginning of the year. Housing inventory increased moderately, nevertheless it had a long way to go to reach market equilibrium. One respondent indicated that buyers were out looking again but it would be a better scenario if there were more homes available for sale. The low housing inventory also has resulted in fewer closed and pending home sales this period. Sales prices decreased modestly from their peak last spring; however, terms were more beneficial to the buyers. Lumber prices were down but overall construction costs remained high; the average base cost of a new home was up 33% in the last 2 years.
Commercial real estate activity remained unchanged since the last period. However, rent costs were moderating in certain sectors. Leasing rates for multifamily were starting to decrease, particularly for mid-priced units; high end apartment rents were unchanged. Retail leasing was strong this period especially for service and food businesses. New retail centers continued to be built and most were pre-leased, leading to lower vacancy rates. The industrial market continued to be strong with higher rental rates and good absorption levels. The supply of Class A space tightened, particularly in suburban markets. Commercial contractors noted that a general shortage of key components, including labor, remained a significant factor. Overall, commercial buyers remained hesitant to commit due to market uncertainty.
Banking and Finance
Financial institutions noted a continued weakening of loan demand across all loan types, especially in the commercial portfolio. Increasing interest rates were mentioned as the primary driver of this weakening, along with borrower uncertainty about the strength of the overall economy. Deposit levels continued to decrease, with competition for deposits beginning to rise. Moderate deposit interest rate increases were noted as institutions work to maintain their base. Institutions are observing a stabilization of delinquencies within their loan portfolios with no increases reported. Financial institutions expected moderate decreases in loan and deposit levels for the remainder of the year.
Nonfinancial Services
Nonfinancial service providers reported stable demand for their services but a flattening of revenue. Contacts expressed a general feeling of concern that their clients had with inflation and recession fears, which was impacting the level of work being performed by their firms. They were also seeing less non-mandatory engagements being performed, with clients sticking to only what is necessary for their businesses. Contacts were also seeing a slight change in the mix of sectors that were utilizing their services. Attracting labor was still a concern with contacts, and they were looking for ways to maintain and grow their workforces.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis