Beige Book Report: Richmond
September 6, 2023
Summary of Economic Activity
The Fifth District economy grew slightly in recent weeks. Retailers and food service contacts reported steady to modest growth in sales, despite lower foot traffic. Auto sales were solid this period, but other consumer durables saw declines. Travel and tourism rose modestly as summer vacations were in full swing. Nonfinancial services firms noted stable demand, even with price increases caused by higher costs. District ports remarked that imports slowed as retailers and manufacturers still had elevated inventory levels. Loaded exports, particularly agriculture products, remained strong. Fifth District manufacturers reported a slowdown this period. Trucking firms reported steady, but low, levels of freight volumes this cycle. Residential real estate respondents stated that the limited inventory of homes for sale has put upward pressure on sales prices. Commercial real estate markets slowed this period; however, leasing remained strong for retail and industrial properties with rents continuing to escalate. In contrast, office and multifamily rents were starting to soften. Loan demand was stable this period despite shrinking deposit levels at banks. Employment increased modestly but at a slower pace than in previous reports. Many contacts indicated that the labor market remains extremely tight but wage growth eased slightly. Price growth continued to ease but remained elevated compared to pre-pandemic levels.
Labor Markets
Employment in the Fifth District increased modestly over the most recent reporting period but at a slower pace than in previous reports. Some contacts stated that the labor market remained tight and were doing what they can do to find employees. A recruiting agency's clients are bypassing temp-to-hire workers and just bringing them on full-time. A bearings manufacturer reported that their skilled tradesmen were approaching retirement, so the company was trying to revitalize their apprenticeship program to train young adults out of high school and community colleges. An office furniture installation company reported that when people do show-up for interviews, their wage demands were too high to match their skill set.
Prices
Price growth eased somewhat in recent weeks but remained elevated. According to our most recent surveys, growth in prices received by manufacturers declined to an annual rate of just over three percent. Service sector price growth also eased slightly but remained more elevated at a five percent growth rate. A plumbing supply company said material costs had fallen and they were passing along those savings by lowering their prices. Several service providers noted that wage pressures eased as the availability of labor improved somewhat, which helped to slow the increases in labor costs.
Manufacturing
Fifth District manufacturing slowed somewhat in the most recent reporting period. A steel coater stated that the economy is in a "caution zone" and their customers are only ordering products they know they can sell quickly. A fabrics manufacturer reported that their business is volatile due to the fact that their customers do not have the confidence to hold much inventory. Finding workers remained a significant issue, and firms are finding ways to minimize costs associated with hiring. A coffee manufacturer cited that they cannot pass costs on to customers anymore and will invest in technology throughout the production process to rely less on labor.
Ports and Transportation
Fifth District ports stated that loaded import volume was down but back to pre-pandemic levels. Imports were lower year-over-year but flat month over month; the decline in import volume was mainly due to a decrease in consumer goods. Exports were slowly ticking up, primarily for agricultural products, wood pulp, resins, and vehicles. Spot shipping rates decreased and were slightly lower than 2019. Carriers had reduced shipping capacity in order to maintain price. Gate turn times improved and container dwell times returned to normal levels. Demand for airfreight stabilized after declining over the last 18 months and air cargo rates dropped precipitously, but both are still above pre-pandemic levels.
Trucking firms reported that with the decrease in the number of carriers, there have been incremental opportunities to pick up freight. Demand was steady this period as there was no sizable decrease in freight volumes. Spot rates increased slightly, particularly with third party, transactional freight. However, respondents indicated that they were able to get moderate increases with their contract rates despite customers being very price sensitive. Trucking companies indicated that drivers were more readily available but that job openings for mechanics and shop staff were still difficult to fill. Firms also stated that they were experiencing higher costs of labor, parts and new equipment.
Retail, Travel, and Tourism
Consumer spending grew at a modest rate in recent weeks. Retail and food service contacts reported steady to modest growth in sales despite some declines in foot traffic as warm weather and summer travel led to fewer customers coming through the doors. In contrast, a couple of furniture stores saw sales decline as a result of the softness in real estate markets. Auto sales remained solid this period.
Travel and tourism rose moderately as summer travel was in full swing. Coastal areas of North and South Carolina saw strong visitation with increased room nights sold and high levels of occupancy. Average room rates were down slightly compared to last year but revenue was still up, overall, because of the strong growth in room nights sold. An airport reported strong passenger traffic and increased seat capacity but fewer flights as larger aircraft were being utilized.
Real Estate and Construction
Residential real estate respondents indicated that the limited inventory of homes for sale has boosted competition among buyers and has put upward pressure on sales prices. Sellers who secured low mortgage rates have been hesitant to sell, leaving a dearth of new listings leading to a decrease in closed sales. Overall, home sales were constrained by both affordability and by the lack of inventory. In the last month, buyer traffic was lower due to the usual seasonal slowdown. Days on market increased slightly, mostly related to stale inventory. Prospective buyers were not having any difficulties obtaining mortgages. Home builders indicated that construction costs leveled off but remain high relative to pre-pandemic levels.
Overall market activity in the Fifth District commercial real estate sector slowed this period. However, leasing remained strong for retail and industrial properties with rents continuing to escalate. In the office market, companies were looking to decrease rental cost by downsizing and relocating to smaller footprints in higher quality buildings. Rental rates in the office segment remained flat; however, landlords were offering more incentives and/or concessions to potential tenants. In the multifamily sector, rents were starting to soften partially caused by a new supply of multifamily units coming onto the market. Respondents stated that some banks have pulled back on new commercial real estate lending activity and that, coupled with higher interest rates, has made deals less attractive, and in some cases, not viable.
Banking and Finance
Loan demand was unchanged in recent weeks and has returned to pre-Covid levels. This stable demand has been noted across all loan portfolios, consumer and commercial. One observation was loans were being originated for only what must be done and no more. Home equity loans and lines saw an increase in demand, with respondents noting borrowers were not keen to refinance lower rate first mortgages for their needs. Deposit levels continued to shrink, and competition for balances was still strong. Credit quality continued to be a concern as the cost to borrow increased while delinquency rates remained stable at low levels.
Nonfinancial Services
Nonfinancial service providers continued to report that demand for their services as well as revenues had remained stable. One respondent observed that demand continued, even with price increases due to higher costs. Some noted that clients were finding themselves constrained due to the increasing lack of access to capital, keeping their growth muted. Labor shortages continued to ease, but wage pressures continued to be present in the marketplace. An overall sense of economic uncertainty was noted with many of the respondents, driving much of the decision making at their firms as well as their clients.
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis