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The Fifth District economy grew slightly this cycle, down from the modest pace of growth reported in the previous report. Consumer spending rose mildly, but there were reports of consumers pulling back on big-ticket items and becoming more price-conscious at restaurants. Leisure and business travel increased moderately. Residential real estate showed a typical seasonal slowdown while commercial real estate leasing activity picked up slightly. Import and export volumes rose moderately as retailers resumed more typical ordering patterns; however, manufacturers in the District reported softening demand. Employment rose slightly in recent weeks and wages continued to rise at a moderate rate. For some businesses, wage growth outpaced price growth and led to tighter margins.
Employment in the Fifth District grew at a slight pace in the most recent reporting period. Hiring was mixed based on business performance. A precision sheet metal fabricator laid off a quarter of staff since last year due to declining orders. A furniture textile manufacturer has not backfilled positions because of declining demand for residential furniture. For contacts that were hiring, persistently higher rates of wage increases continue to put pressure on margins. A donut shop raised their prices due to increased labor costs to catch up with decreased profits. A pet groomer was investing in equipment and process improvements to reduce labor costs. Lastly, a thrift store raised wages and found that worker quality increased, although doing so impacted their margins.
Price growth was little changed in recent weeks and remained at a moderate year-over-year rate. According to recent surveys, annual growth in prices received by service-providing firms edged down but remained elevated at around three and a half percent. Meanwhile, growth in prices received by manufacturers rose slightly to about two and half percent year-over-year. Several contacts said that their ability to raise prices was more constrained due to customer pushback on price increases. Some added that their profit margin was compressed as costs and wages continued to rise.
Fifth District manufacturing activity declined slightly in the most recent period. Several contacts in interest-rate-sensitive sectors reported that changing customer preferences slowed demand. A furniture manufacturer reported declining orders due to higher interest rates and consumers not wanting to purchase new furniture on credit. A wall panel manufacturer reported demand being off due to customers being cautious and looking for discounts before placing orders. Manufacturers also reported increased input costs. A coffee roaster reported higher prices for freight, insurance, and packaging. A food manufacturer also reported increased costs for inputs but couldn't raise prices due to pushback from retailers concerned that end customers wouldn't accept higher prices.
Ports in the Fifth District reported moderate increases in imports and exports due to normalized purchase order patterns from retailers and global manufacturers. Imports of furniture and sporting goods were up, but contacts reported otherwise flat demand for durable goods with modest growth expected for the year. During this period, container spot rates surged 200 percent higher than last year due to capacity constraints and long transit times around the Cape of Good Hope. Rebounding water levels in the Panama Canal have allowed for vessel restrictions to be lifted, which may impact ocean carrier route plans in coming months. The Port of Baltimore has reopened to full channel depth and width capacity; however, in South Carolina, a system-wide software issue in May and a container spill in June caused temporary delays in port operations.
Air freight demand during this period was moderately down from last year, continuing a yearlong trend. One contact cited geopolitical tension between the US and China as a contributing factor in losing two weekly cargo flights from South Carolina to Shenyang (25 percent of the airport's cargo freight operation). Respondents in the trucking segment lamented weak demand and carrier rates as low as $1.10 per mile. Firms noted a shift in owner-operators closing their business and returning to work at bigger companies, defaults on chassis rentals, and "sticky" high prices of equipment causing them to hold onto old vehicles and trailers longer than desired.
Overall consumer spending increased slightly this reporting period; individual reports were mixed though several retailers reported steady-to-slightly lower sales with less customer traffic fewer big-ticket purchases too.A restaurateur an ice cream chain owner flat sales time year they typically experience growth.Restaurateur added average revenue per customer flat customers ordering fewer menu items response higher prices.Hotel travel contacts solid recent weeks particularly leisure places like coastal North South Carolina.Business travel picked up slightly remained lower level compared pre-pandemic.Additionally airport contact noted people seemed extending travel business reason include leisure activities.
Residential real estate activity showed typical slowdown heading summer months gradual increase homes hitting market total closings steady Prospective buyers facing challenges higher prices rather approvals appraisals Online buyer traffic rising contrasting decline-person visits New construction expanding regions experiencing population growth
Commercial real estate activity increased slightly recent weeks Retail leasing picked keeping vacancy rates low limited new inventory quickly absorbed Office sector leasing increased Class spaces declined B C properties widening vacancy gap different qualities office space Agents Virginia Maryland noted tenants rightsizing office needs upgrading Class space Leasing absorption observed new multi-family buildings strong contrary developers facing challenges project approvals higher interest local government policies impacting financial viability amid rising labor Sales minimal
Financial institutions overall loan demand remained modest within certain types home equity loans used autos they modest increases Those institutions noted increase commercial loans also noted driven special loan rates lack competitors segment Deposit levels continued decline competition still strong balances came market no change underwriting standards noted requests loan delinquency rates stable across all types
Nonfinancial service providers continued report demand services revenues stable An engineering firm competition market strong other reducing rates gain new Another respondent noted investing equipment process improvements reduce increasing labor impacted margins staffing firm indicated slight uptick services first quarter investigating use artificial intelligence automate initial hiring processes
For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.
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