Beige Book Report: Richmond
April 19, 2023
Summary of Economic Activity
The Fifth District economy contracted slightly since our previous report. Manufacturing activity softened as new orders fell and more customers started pushing back on price increases. District ports and trucking companies reported declines in freight volumes, particularly a sharp decline in import volumes, leading to lower shipping and trucking spot rates. Consumer spending on retail goods and autos slowed slightly; however, spending on tourism and travel increased moderately. Residential real estate markets softened as closings and pending sales declined while listing prices held flat. Commercial real estate activity declined, on balance. The retail and industrial real estate segments remained strong; however, the remaining segments, particularly office, softened. Financial institutions continued to report modest declines in loan demand. Deposit levels also declined, on balance, despite some institutions reporting an inflow of deposits from new clients. Demand for nonfinancial services was unchanged in recent weeks. Employment rose slightly and wages increased moderately, due in part to recent minimum wage increases in some Fifth District jurisdictions. Price growth remained robust; however, there were several reports that customers were starting to reject further price increases or insist on reduced prices.
Labor Markets
Employment increased slightly in the Fifth District over the most recent reporting period. Contacts continued to report a lack of qualified workers as a significant issue for their business. A Maryland construction contact reported better than expected demand, but projects were slowed by a shortage of skilled labor. A South Carolina staffing firm said that demand for engineering and skilled trades workers has been consistently high and doesn't show signs of slowing. Wages picked-up moderately, due in part from increases in the minimum wages in Maryland, Virginia, and the District of Columbia. A Virginia retailer reported that the minimum wage increase resulted in wage increase for all workers, not just those making the minimum.
Prices
Prices continued to grow at a strong rate, particularly for services. According to our recent surveys, manufacturers reported average price increases around 5.5 percent, but this was down considerably from the peak set in 2022. Services sector firms, on the other hand, saw prices continue to rise at a near-peak rate of about 6.5 percent. There were some reports by firms in both sectors that customers were starting to push back on further price increases. One manufacturer said that they were under pressure to cut prices, which would compress margins as input costs were still rising.
Manufacturing
Manufacturing activity in the Fifth District softened modestly in recent weeks. Overall, manufacturers reported a decline in new orders. A fabric manufacturer that produces products for retail stores said that they were working through an inventory glut, and were hoping that as inventories clear, new orders would increase. Manufacturers also reported more push-back from clients on price increases. A label printer reported increased pressure from purchasing teams to reduce pricing this year. With supply chain pressures easing, purchasing teams were "raging back and shopping the business." Finding workers remained an issue. An aluminum producer cited that growth is limited severely by availability of skilled labor and administrative workers.
Ports and Transportation
Fifth District ports reported a sharp decline in loaded import volumes this period. Imports of retail goods and household related items were down. Additionally, due to the extended Chinese New Year, there was an increase in blank sailings. Loaded exports were stronger and driven by auto and machine parts as well as rolling stock. Empty containers were dwelling slightly longer at the port. Shipping carriers had excess availability this period. Spot rates fell to pre-pandemic levels or below and were significantly under current contract rates. Air cargo demand continued to soften with airfreight rates stabilizing as airlines pulled back on freight capacity.
Trucking firms reported a moderate decline in freight volumes this period. Respondents indicated that there was excess capacity in the truck load segment but less-than truckload demand was not down as much. Spot market rates decreased slightly with carriers experiencing some push back from customers on further rate increases. Trucking firms stated that in response to lower freight volumes, they were still adding drivers, but they had scaled-back recruiting and were being very selective in hiring. Availability of new tractors and trailers from manufactures continued to improve and there was a glut of used trucks on the market due to a few regional trucking companies going out of business.
Retail, Travel, and Tourism
Fifth District retailers reported a slight pull back in sales and demand in recent weeks. An auto dealer said that sales were down and customers seemed skittish about making big ticket purchases. Similarly, an appliance and electronics store saw a slowdown in demand and customer traffic. A couple of retailers, however, noted that their typical busy season doesn't start until April, so they were expecting business to pick up soon.
Travel and tourism increased moderately in recent weeks. Hotels in the Fifth District reported increases in the number of rooms sold and because room rates were higher than last year, revenue growth was strong. One hotel in South Carolina said that their business was highly tied to events in the area and volumes were up in recent weeks because of sports tournaments. Lastly, a regional airport saw a rebound in air traffic but to a level still slightly below 2019 levels; however, they expected to surpass 2019 levels by this summer.
Real Estate and Construction
Residential real estate respondents noted that so far it hasn't been the typical robust spring market, evidenced by a decline in both sales and pending sales. Days on market have increased, but still not above the historic average; housing inventory has decreased year-over-year with substantially less new listings. Sales prices have remained flat for this period, but new contracts were starting to come in at less than list price. Many potential home buyers were priced out and sellers were having to offer concessions to close deals. Higher mortgage rates have made finding affordable homes even more of a challenge. Construction costs were down, but overall, home builders are no longer acquiring new building lots due to economic uncertainty.
Overall commercial real estate market activity decreased in the last month, particularly in the office sector. Retail and industrial/flex space leasing remained robust this period. The industrial market continued to be strong with higher rental rates and good absorption rates. However, rents were moderating in other commercial real estate sectors and landlords were increasing their incentives and concessions. Rising interest rates slowed sales and commercial real estate capital markets activity was negligeable. Some banks had stopped lending for new commercial construction projects and/or had tightened underwriting standards; many equity lenders also had left the market. Many respondents cited a looming issue of certain CMBS loans that are coming due in 2023 being unable to qualify for refinancing.
Banking and Finance
Loan demand continued to slow modestly across almost all loan types, with the most weakness seen in the commercial loan portfolio. Consumer loan demand was mixed, with home equity and used auto loans showing some increased demand over the last few months. Consumer mortgage demand, especially refinancings, have slowed, which contacts attributed to rising rates. Deposit levels declined slightly, on balance, however a few banks did see an inflow of deposits following the failure of Silicon Valley Bank. Loan delinquencies continued to increase, albeit slightly and still not to pre-covid levels. Financial institutions expected moderate declines in loan and deposit levels for the remainder of the year.
Nonfinancial Services
Nonfinancial service providers continued to report steady demand for their services along with stable revenues. Providers also continued to express concerns over their ability to attract and retain employees. Common themes that were noted were the higher wages demanded by applicants, a lack of qualified employees, and retaining new hires employed after they arrive on the job. Firms reported getting push back from clients and customers over price increases and some were considering looking for lower cost alternatives or to cut costs elsewhere in their business to offset these higher prices.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis