Beige Book Report: Richmond
May 31, 2023
Summary of Economic Activity
Economic activity in the Fifth District was little changed, on balance, in recent weeks. Manufacturing activity was unchanged as new orders from retailers softened while orders from industrial clients were strong. District ports saw a moderate decline in total volumes as import activity fell; however, export volumes held strong. Trucking firms also reported declines in demand and shipping rates and put a pause on hiring as a result. Retail spending declined slightly overall, although some goods categories saw gains. Consumer spending on travel and tourism, on the other hand, increased moderately. Residential real estate activity picked up slightly amid historically low levels of existing home inventory. New home sales slowed, however, and builders offered incentives to close deals. Commercial real estate activity declined modestly, but some segments such as medical, industrial, and retail leasing remained strong. Overall, loan demand declined across commercial loan types, deposit levels declined, and delinquencies rose but were still near historically low levels. Meanwhile, nonfinancial services saw modest growth in demand and steady revenue growth. Employment rose modestly amid a tight labor market; however, wage growth moderated. Inflation remained high despite a slight slowdown in the pace of price growth in recent weeks.
Labor Markets
Firms continued to grow their employment levels modestly over the most recent reporting period. Several firms reported having multiple open roles they were not able to fill due to a tight labor market. A textile manufacturer was struggling to hire the "next generation" of workers to replace retiring workers, as the average age of new hires is in the fifties. Many other firms, on the other hand, were adequately staffed and held employment levels unchanged. Firms reported already having gotten through their large wage increases and are feeling okay with the current level of moderate wage growth. A craft beer manufacturer reported that wage growth, although still somewhat high for the skill set of workers, has stabilized from last year.
Prices
Price growth eased slightly in recent weeks, but overall inflation remained elevated. According to our surveys, year-over-year growth in prices received by services slowed slightly while growth in prices received by manufacturers was little changed. In both sectors, price growth remained well above historical levels. A small appliance manufacturer, however, said that costs had fallen as shipping costs from China returned to pre-covid levels. As a result, combined with pressure from big box retailers that were looking to cut prices to consumers, the firm was lowering its prices.
Manufacturing
Manufacturing activity was mixed in the most recent reporting period. Finding and retaining workers remained a significant concern. A packaging manufacturer purchased two pieces of equipment so they could grow their business through productivity-enhancing technology rather than with new employees. A steel manufacturer increased the frequency and amount of bonus payments to maintain a stable workforce. New orders, on balance, were down compared to the previous reporting period. Several contacts reported that their clients had excessive inventory, resulting in lower levels of business. Contacts reported that retailers have "right sized" their inventory levels, resulting in new orders returning to pre-pandemic levels.
Ports and Transportation
Fifth District ports reported a moderate decline in loaded import volume this period. Imports of consumer goods and automobiles were down. However, with the growth of investments in manufacturing, there was an increase in imports of machinery and parts. Loaded export volumes were strong and mainly driven by agricultural products and lower value commodities, as well as rolling stock. Container dwells have shortened dramatically and there were no issues with empty containers causing backups at the port. Spot rates were low relative to the last two years, but transatlantic spot rates are still slightly above their pre-pandemic level mainly due to some blank sailings and carriers removing capacity. There was a return of some purchasing power back to the shipper.
Trucking firms reported a sharp decline in freight volume this period with excess capacity in the system. Respondents indicated that there was a freight recession, and it was more difficult to find loads. Weakness in demand was primarily in consumer and industrial segments. Spot prices have declined primarily due to more price sensitivity by shippers and competition for freight. Consequently, trucking firms stated that they had implemented a pause in hiring and were anticipating decreasing the number of drivers by attrition. Trucking firms also said that the supply chain had improved with better availability of equipment and parts.
Retail, Travel, and Tourism
Retail spending softened slightly, on balance, but sales growth varied by market segment. For example, a couple of furniture stores said sales were down because home sales were low. Additionally, sales were reportedly down for some consumer durables—like household appliances, sports equipment, toys, and games—whereas some apparel and cosmetic products sales were up. Retailers continued to work down inventories and were hesitant to make new orders.
Travel and tourism increased moderately this cycle. Hotel performance remained strong with increased room nights sold and strong revenue per room amid continued, but slight, room rate growth. Sports and entertainment venues also reported increased demand and steady revenues in recent weeks.
Real Estate and Construction
Residential real estate respondents indicated that the spring market was off to a good start with sales prices continuing to appreciate but not at the same pace as last year. Inventory of homes for sale remained constrained due to a fewer people putting their homes on the market after locking in a low interest rate during the pandemic. Buyer traffic was steady and days on market increased slightly in the last month. However, fluctuations in mortgage interest rates caused buyers to pull back, with pending sales and closed sales both down this period. Builders were offering strong incentives to close deals. Some residential renovation firms noted a steady decline in closing sales due to the cost of those services and the consumer's lack of funding.
Overall commercial real estate market activity slowed in the last month, except for retail, medical and industrial/flex space leasing, which remained robust. Class A office vacancy/subleases increased this period in most markets. Rental rates remained flat; however, landlords were offering higher incentives and/or concessions to potential credit tenants. Respondents stated there was very little new construction activity and limited credit availability for commercial real estate deals, especially in the office sector. Additionally, respondents cited some cases of commercial real estate loan defaults. Commercial contractors noted a continued shortage of labor despite increased wages. As well, they reported that requests for new work had slowed down considerably.
Banking and Finance
Loan demand was down slightly across all commercial loan types, including commercial real estate, where rising interest rates and increased underwriting scrutiny kept growth muted. Consumer lending continued to be stable, with moderate demand for both new and used auto loans. Deposit levels continued to drop but have started to stabilize. Institutions noted that they were working closely with customers to maintain deposit balances and tailoring products to meet their needs due to rising rates and increased competition in the overall marketplace. Loan delinquencies continued to rise, but at rates that were still near historically low levels.
Nonfinancial Services
Nonfinancial service providers reported modest growth in demand for their services and stable revenues. Firms continued to work through their backlogs and backorders of work, and they noted those streams were what was keeping revenues stable for now. Firms continued to struggle with finding qualified employees and noted the labor markets were still "tight", even with large technology firms announcing layoffs. They also noted that external costs continued to rise as well. One respondent noted that the future has never been "so foggy and murky" for their firm as well as their customers when it comes to expected revenues and growth.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis