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Fed’s Fifth District economy grows slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew slightly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. Wednesday’s release is an update from the Fed’s Oct. 18 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District rose moderately in the previous few weeks, although the labor market remained tight. To retain workers, one general contractor reported wage increases as large as 15% for its highest performers. Trucking firms reported that drivers were more readily available but that it remained difficult to hire skilled mechanics.

Year-over-year price growth remained elevated in the latest Beige Book reporting period but moderated slightly. Prices received by service providers increased a little more than 4% compared with last year, down from the peak of about 7%, according to Fed surveys. Prices received by manufacturers increased by just over 2% compared with last year.

Fifth District manufacturers’ reports were mixed. A textile manufacturer reported an increase in demand from clients who had worked through excess inventories that built up during the COVID-19 pandemic. A furniture manufacturer, however, reported the home furniture industry had been in an 18-month recession, and the manufacturer did not expect demand to increase soon. Several respondents reported they had invested in automation to increase productivity and manage costs.

Ports in the Fifth District reported that trade volumes were down in this reporting period. Imports were flat year-over-year but slightly up month-over-month, mainly from increased consumer goods coming in. Exports were down for the most part. Ports did not have issues with container congestion.

Trucking firms saw low underlying demand, particularly on the industrial side, as freight volumes for construction materials were down. Companies reported they had not had issues maintaining their fleets of trucks and trailers and that new equipment orders had no significant backlogs.

Consumer spending increased modestly in recent weeks, according to the Fed. Clothing and grocery stores reported increasing or steady sales and demand, but furniture and appliance stores reported decreases in purchases. Travel and tourism respondents reported steady to increasing activity.

Residential real estate sales volumes and buyer traffic decreased due to low inventory and higher mortgage rates. New listings were down, and days on the market increased slightly but stayed below historic averages. Although sellers often dropped sales prices or provided concessions for homes that had been on the market for more than 30 days, upward pressure on home prices, especially in more desirable neighborhoods, continued. Builders reported a high cost of materials, labor, trades and financing.

Commercial real estate sources reported slow market activity. The industrial and retail markets were fairly stable, reporting low vacancy rates and rising rental rates. Office building owners offered concessions, incentives or tenant improvement allowances to secure new leases, effectively lowering rental rates. Thanks to new construction coming to market, multifamily rents were flat or down.

In the financial sector, loan demand continued to slow, particularly in the commercial and consumer real estate segments. Sources attributed the softening to high interest rates and global and domestic political concerns. Many institutions increased deposit interest rates, focusing on money market accounts and certificates of deposit, to support deposit retention and growth.

Demand for services and revenues for nonfinancial service providers in the Fifth District remained stable. Wage and expense pressures began to moderate. One respondent expressed concern that demand could soften as student loan repayments restarted and consumers saw decreased discretionary income.

Fed’s Fifth District economy shrinks slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) contracted slightly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. Wednesday’s release is an update from the Fed’s Sept. 6 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment and wages in the Fifth District grew modestly over the previous few weeks. Companies reported continued trouble finding skilled workers, such as CDL drivers and motorcoach drivers. However, a staffing firm that specializes in executive-level marketers had too many candidates for the number of available jobs.

Prices continued to increase at an elevated rate, but growth was lower than this time last year. Manufacturers reported an unchanged growth in prices received and a slight increase in prices paid for nonlabor inputs. Services firms saw a marginal slowdown in prices received and a decline in nonlabor input prices. Labor costs for both continued to grow.

Manufacturers in the Fifth District reported mixed results, and several cited macroeconomic factors, like fears of a potential recession, as reasons for slowdowns. A gaskets manufacturer reported it was halting hiring, citing fears of a potential economic downturn. A fabric manufacturer said consumer demand declined because retailers had too much inventory, while a steel manufacturer reported strong demand during the same period.

Fifth District ports reported weak demand. Imports were lower both year-over-year and month-over-month, mainly because fewer consumer goods were coming into port. Export volume remained flat, however. Container dwell times returned to normal.

Trucking firm respondents said demand was flat this reporting period, but several trucking companies shut down, allowing carriers to slightly raise freight rates as they exited and reduced market capacity. Companies did not see the normal seasonal uptick this period.

Consumer spending in the district grew slightly, but spending growth varied by category. Food service, grocery stores and office supply stores reported steady or increased sales, while furniture, appliance and home remodeling and repair stores reported declining sales.

Travel and tourism activity slowed slightly this period, partly because of a typical seasonal shutdown and partly because of the threat of hurricanes in coastal destinations, according to respondents. Business travel picked up, helping to offset the reduced leisure travel.

Elevated prices, a lack of inventory and high mortgage rates constrained home sales in recent weeks, and the number of new listings in the Fifth District was down year-over-year. Days on the market increased slightly. Home prices held steady, although some were reduced for homes that had been on the market for more than 30 days.

Commercial real estate development and construction reduced significantly. The availability of credit and cost of capital were the main barriers to projects moving forward, as credit underwriting requirements tightened. Industrial and retail leasing demand continued to outstrip supply, escalating rents.

In the financial sector, loan demand continued to slow, primarily in consumer and commercial real estate portfolios. Banks struggled to maintain deposits.

Nonfinancial services providers reported stable demand and revenues. In terms of labor, applicant pools grew but remained under historical norms, and wage pressure continued.

Fed Fifth District economy grows slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew slightly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. Wednesday’s release is an update from the Fed’s July 12 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District increased slightly over the most recent reporting period but not as quickly as it did in prior reports, according to the Fed, and some firms reported that the labor market continued to be tight. Service providers noted that the labor pool improved, though, helping to slow wage growth.

Price growth eased in recent weeks but remained high. Price growth for manufacturers dropped to an annual rate slightly over 3%, according to Fed surveys. For service providers, annual price growth remained at about 5%.

Manufacturing slowed, and hiring for the sector remained difficult, according to respondents.

Import volume in Fifth District ports dropped back to pre-pandemic levels, largely because of a decrease in consumer goods. Imports were lower year-over-year but flat month-over-month, ports reported. Exports rose slightly, mainly for agricultural products, wood pulp, resins and vehicles. Container dwell times dropped to normal levels, according to the Fed.

Trucking firms reported steady demand and moderate increases in contract rates. Labor, parts and new equipment costs were high, however.

Consumer spending grew modestly, according to respondents. Auto sales remained steady, and retail and food service companies saw steady or modest sales growth. Furniture stores reported declining sales, likely because of slower real estate markets.

Travel and tourism rose because of summer travel. In the Fifth District, revenue grew because of room nights sold, but average room rates were down compared to last year. That wasn’t the case for Virginia from January through July — hotel revenues rose compared with 2019 because of high room rates, but hotel rooms sold dropped.

The residential real estate market remained tight across the district and saw a seasonal slowdown. Respondents reported increased sales prices because of low inventory. Virginia has reflected the larger trend, with home sales slowing because of the low inventory and increased prices.

Fifth District commercial real estate activity slowed, although retail and industrial leasing saw rising rents. Companies continued to downsize offices. Office rental rates were flat, but landlords offered additional incentives to tenants. Multifamily rents began to soften as more units came onto the market.

In the financial sector, consumer and commercial loan demand remained stable at pre-pandemic levels. For banks, deposit levels continued to shrink.

Finance | Insurance 2023: THOMAS I. BARKIN

As president and CEO of the Federal Reserve Bank of Richmond, Barkin serves as an alternate on the Fed’s interest-setting Federal Open Market Committee and will be a voting member next year. In his position as head of one of 12 regional Fed banks, he is also responsible for the Fed’s information technology.

In June, weeks before the Fed raised rates to a 22-year high in its ongoing attempts to fight inflation, Barkin told reporters in Richmond that he worried that continuing hikes “might well lead to a greater set of people feeling left behind.” During his tenure, Barkin has advocated for disadvantaged rural communities in the Fed’s Fifth District, which covers South Carolina, North Carolina, Virginia, Washington, D.C., West Virginia and Maryland.

Barkin previously served as chief financial officer and chief risk officer for global consultancy McKinsey & Co. He also served on the board of directors for the Federal Reserve Bank of Atlanta, chairing the board for a year.

Additionally, Barkin has served on the Emory University board of trustees since 2014 and is on the board of the Community Foundation for a greater Richmond. Barkin attended Harvard University, earning bachelor’s, MBA and law degrees.

Fed Fifth District economy shrinks slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) has contracted slightly since March, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources.

Here’s what the April 19 Beige Book edition revealed about the direction the economy is taking:

Manufacturing activity softened as manufacturers had fewer new orders, and customers began pushing back on price increases as supply chain pressures eased. Employers continued to struggle to find skilled workers.

Travel and tourism spending increased moderately in the region. The sector saw strong revenue growth, with hotels reporting increases in the number of rooms sold and higher room rates compared with last year. In February, Virginia hotel revenues were 14.9% higher than those recorded in February 2019.

Ports and trucking companies in the Fifth District reported declining freight volumes, especially in imports of retail goods and household items. Exports of loaded containers were stronger, though, particularly in auto and machine parts. Empty containers remained at ports slightly longer.

Because shipping carriers had excess availability, their spot rates fell to pre-pandemic levels or below, significantly under contract rates. Airfreight rates stabilized as airlines pulled back on freight capacity, according to the Fed.

Trucking companies saw a moderate decline in freight volumes and received some customer pushback on continued rate increases. Firms continued to add drivers but scaled back recruiting because of the lowered freight volumes. The supply of new tractors and trailers improved.

The Fifth District’s employment increased slightly compared with its March report, although respondents reported a continued lack of qualified workers. Wages increased modestly, partly because Virginia, Maryland and Washington, D.C., increased minimum wages.

Prices in the region continued to grow at a strong rate, the Fed reported. Manufacturers reported average price increases of about 5.5%, down from the 2022 peak, and service sector firms reported prices increases of about 6.5%, a near-peak rate.

Retail activity remained strong, although firms reported slightly lower sales and demand. Some retailers said they expected business to pick up soon, as their busy seasons started in April.

The typical spring housing market did not appear. Sales and pending sales in the Fifth District residential real estate market declined, and sales prices remained flat, although respondents began seeing new contracts at less than list price. Housing inventory has decreased year-over-year, and new listings have dramatically decreased. Although construction costs were down, builders did not buy new lots because of economic uncertainty.

Commercial real estate activity declined overall last month, particularly in the office market. Retail and industrial/flex space leasing, however, remained strong, and the industrial sector had higher rental rates. Sales slowed due to rising interest rates, and some banks stopped lending for new commercial construction projects or tightened underwriting standards.

Demand for all types of loans slowed modestly, but the commercial loan portfolio was the weakest. The region saw mixed demand from consumers, but demand for home equity and used auto loans increased some.

Deposit levels declined slightly, although some banks had an inflow of deposits following Silicon Valley Bank’s collapse. Financial institutions expected loan and deposit levels to decline moderately for the rest of the year, according to the Fed.

Innovation, capital key to rural growth, Barkin and Warner say

There’s hope for economic growth in rural areas despite their challenges, Federal Reserve Bank of Richmond President and CEO Tom Barkin and U.S. Sen. Mark Warner said Wednesday during the Fed’s 2023 Investing in Rural America conference in Roanoke.

Rural areas could overcome economic development challenges, particularly housing shortages and lack of broadband access, with innovation, Barkin said, while Warner focused on access to capital as a solution.

“Simply put, the math just isn’t working to put new residents into housing that’s affordable for them. We don’t have enough supply, and building is getting ever more expensive with construction, interest and labor costs up,” Barkin said.

Small towns have additional challenges with housing because existing housing is often older construction, rough terrain makes it difficult to build, and absentee landlords can slow or prevent construction — all of which can lead developers to build elsewhere.

But localities can work to develop buildable sites for home developers or redevelop vacant commercial or municipal spaces, Barkin said. A Carroll County redevelopment provides an example: The county donated a high school, and Virginia Housing Development Authority helped identify a developer — Landmark Asset Services Inc. — and offered permanent financing at a below-market rate. Landmark redeveloped the high school into 51 affordable housing units.

On the federal level, there’s broad bipartisan support for some housing initiatives, Warner said.

One newer initiative that could help, Warner said, is the Neighborhood Homes Investment Act. Introduced by Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, the act would create a federal tax credit to cover the cost between building or renovating a home in distressed neighborhoods and the price at which the homes could be sold.

“If you look at rural communities … virtually all over Virginia,” Warner said, “it is, not only the need for additional housing stock, but we’ve got a lot of old housing stock … that just isn’t fit to live in. So is there a way rather than starting from scratch entirely, but to think about putting a tax rate in place that will allow that reconstruction back into open market rate but also in a way that makes it happen?”

High-speed, reliable broadband is a necessity for any rural growth, Barkin and Warner said, an issue Barkin also touched on in 2019. Under former Gov. Ralph Northam, Virginia allocated more than $700 million of its almost $4.3 billion in American Rescue Plan Act funds toward broadband expansion. Nationally, the Infrastructure Investment and Jobs Act provides $65 billion to expand broadband access and subsidize the cost for low-income households.

“The bottom line on this issue is if we don’t get at least 97 to 98% broadband connectivity within the next three to four years in all of our states, at both high speed and affordability, then it’s going to be all on us in a failure of execution, because it’s not a failure of bringing capital to the table,” Warner said.

Another side of economic development is workforce cultivation, which small towns need to focus on to draw employers, Barkin said. When deciding where to locate big projects, companies seem to have shifted their primary focus from state incentives to talent.

One way small towns can help develop the local workforce and encourage entrepreneurs is by incentivizing workers to relocate to and work in their localities, Barkin said. West Virginia is testing a direct incentive: The Ascend West Virginia program pays select people to move to the state, providing $12,000 over the first two years, free access to a coworking space and free outdoor recreation and gear for a year.

But small towns can also incentivize local workers by creating access to affordable child care and transportation, he said, like the United Way of Southwest Virginia has through its child care initiative.

Wilson, North Carolina, implemented a successful transportation initiative, working with Via Transportation Inc. to replace its traditional bus system with an on-demand microtransit service that takes riders from curb-to-curb quickly for a low price. About half of those rides are to or from work, Barkin said.

Barkin lauded the Danville-area Great Opportunities in Technology and Engineering Careers (GO TEC) program for its work building a talent pipeline for Virginia target sectors, like health care and robotics. The program educates students in middle school about career pathways and relevant equipment. When they reach high school, students can complete industry certification programs.

Another key piece of rural revitalization is providing capital for entrepreneurs, Warner said, adding that such funding disproportionately goes to urban areas. In fiscal year 2021, Congress gave the Treasury Department $12 billion for Community Development Financial Institutions (CDFIs), of which Virginia has 16, he said, and Minority Depository Institutions. Legislation could help CDFIs by offering tax credits for longer-term capital deposits, provide CDFIs with funding for back office help and create a secondary market for CDFIs to sell debt, he said.

“The nature of many of these loans are bespoke to start with, and how can we then take this effort of bespoke-based loans, package them together and bring them to a secondary market?” Warner said. A secondary market or intermediary could package, or securitize, CDFI assets for investors. CDFIs would be able to gain a loan, sell it off and use the capital it receives to continue making loans without adding to their debt, a Local Initiatives Support Corp. paper explains.

Rural areas also need to develop pitches for companies and workers to locate and stay, Barkin said, citing Southwest Virginia, which has promoted its Crooked Road heritage music trail, the historic Barter Theatre in Abingdon, the Spearhead Trails for outdoor adventure and wineries, breweries and shopping for post-adventure activities.

“The good news is that remote work puts a lot more small towns in the competitive set, and that small towns offer a sense of place and community that many of today’s workers want, so long as they can also get the housing, broadband and amenities that they need,” Barkin said.

Barkin: Raising interest rates is correct course

As inflation remains high and the fallout from recent bank failures seems contained, the Federal Reserve Bank has good reason to continue raising interest rates, Federal Reserve Bank of Richmond President and CEO Tom Barkin said Thursday in a speech to the Virginia Council of CEOs at the University of Richmond.

“It is worth remembering that not every bank failure becomes Lehman Brothers,” Barkin said. “We’re all understandably scarred by the memory of 2008, but banks have failed throughout history, many without creating a broader crisis.”

On March 22, the Fed raises interest rates by a quarter-point, or 25 basis points, pushing rates to a range of 4.75% to 5%.

“If you back off on inflation too soon, inflation comes back even stronger, which requires us [the Fed] to do even more and cause even more damage,” said Barkin, who is currently an alternate member on the Fed’s powerful policy-setting Federal Open Market Committee. “With inflation high, broad-based and persistent, I just didn’t want to take that risk.”

While the broader implications from the failures of Silicon Valley Bank and Signature Bank and resulting actions taken by the Federal Deposit Insurance Corp., the Federal Reserve and Department of Treasury “aren’t yet clear,” Barkin said, banks, including in his region, the Fed’s Fifth District — a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland— seem to be resilient, with relatively stable deposit flows and adequate liquidity.

Meanwhile, the Fed’s interest rate increases don’t seem to be having much of an effect on inflation yet, with the headline consumer price index at 6% in February.

“Monetary policy is said famously to work with long and variable lags, but our 475 basis points of rate hikes over the past year have not yet compellingly moved inflation back to our 2% target,” Barkin explained.

Although inflation could drop quickly if banks tighten access to credit and the effects of increasing interest rates appear, Barkin said he expects it will take time for inflation to cool.

Economic disruptions from the COVID-19 pandemic continue, he said, with low vehicle and housing inventories, continuing order backlogs and a tight labor market. Consumers have unprecedented levels of wealth: “There was stimulus and suppressed spending that together still haven’t been put in the economy — well over a trillion dollars,” Barkin said.

Barkin also pointed to increasing prices and wages, as sectors like health care, utilities and food seek to restore margins to pre-pandemic levels and workers who saw a decline in their real wages seek higher wages to catch up.

Richmond Fed President and CEO Tom Barkin speaks in the University of Richmond's Jepson Alumni Center.
Richmond Fed President and CEO Tom Barkin speaks in the University of Richmond’s Jepson Alumni Center. Photo by Katherine Schulte/Virginia Business

High pricing is the third inflationary pressure that Barkin is watching.

“Supply chain challenges have just worn down purchasing departments,” he said. “They now seem more willing to accept increases, at a time when volatility has made supplier cost structures more opaque and availability more important.”

The Fed will have to be nimble, Barkin said, since the effects of the banking crisis and of high inflation could have wide-ranging results. “And if I’m wrong about the pricing dynamics at play, or about credit conditions, then we can respond appropriately,” he added.

On Thursday, Federal Reserve Bank of Boston President Susan Collins also backed the Fed’s decision to increase rates by a quarter-point in a speech during the National Association for Business Economics (NABE) Economic Policy Conference in Washington, D.C., according to Yahoo!Finance.

What does the future hold? What has happened in the economy in the last two or three years is almost like what happens when the country goes through a war, Barkin said, with lots of spending, monetary support, people moving in and out of jobs and inflation as a result. He’s hopeful the U.S. economy will get through the “post-war” period and calm.

“My hope is that on the backside of this is something that looks more normal,” he said, “looks more like the early ’20s, it looks like the late ’40s and early ’50s, where supply and demand have the opportunity to get back into balance through whatever combination of demand side moves, like the ones we’re making with rates, or supply side moves, like the ones I referenced earlier.”

Va. labor market stayed strong in February

Virginia’s labor market remained strong in February, although growth is slowing, according to employment data from the Federal Reserve Bank of Richmond.

Virginia had a net gain of 3,200 jobs in February. The Virginia state government employment was previously 12,000 jobs below the February 2020 level, but the state government nearly halved that deficit last month by adding 6,200 jobs becoming the sector with the largest employment increase. Total private employment fell by about 3,000 jobs, however.

The data pointed to slowed job growth. Virginia had stronger job gains in January, with more than 16,000 jobs added that month.

“The gain in February is considerably less than we saw in January, but it may not be altogether a bad thing for the overall economy and the inflation situation,” Richmond Fed Regional Economist Joe Mengedoth said Friday. “Slower job growth and less turnover should help ease pressure on wages, and then in turn, overall inflation.”

Two private sectors added jobs: Health care added 2,200 jobs, and transportation and warehousing added 1,000, according to Mengedoth. The Virginia Employment Commission adds utilities to its categorization of the transportation sector and counted 1,100 new jobs in trade, transportation and utilities.

The professional and business services, leisure and hospitality, and construction industries shed jobs last month. The administrative and support subsector accounted for most of the 2,600 jobs lost in the professional and business services sector.

In January, the quits rate in Virginia fell to 2.3%, according to preliminary data from the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey. That’s the lowest level since February 2021, close to the pre-pandemic rate, Mengedoth said.

Although Virginia employers saw less turnover in January, the labor market remains tight, Mengedoth said. Job openings haven’t dropped significantly, and there are more than two job openings per unemployed person seeking a job.

In February, Virginia’s seasonally adjusted unemployment rate was 3.2%, according to VEC data released Friday.

The Virginia labor force participation rate — the proportion of the civilian population ages 16 and older that is employed or actively looking for work — ticked up in January and February and is almost equal to the pre-pandemic rate, Mengedoth said. In February, Virginia’s labor force participation rate stood at 65.6%, according to the VEC.

Rising inflation doesn’t seem to be having much effect on employment in Virginia, Mengedoth said: “There’s a lot of talk about a possible slowdown, but we haven’t really seen any sort of indicators that are pointing to any kind of recession,” and that seems to hold in the labor market.

Businesses don’t seem to have a large appetite to cut employment, even if business slows, because of the difficulty of recruitment, he added.

Crying wolf?

It’s “the most predicted potential recession in memory,” Federal Reserve Bank of Richmond President and CEO Tom Barkin quipped in January, but it hasn’t happened yet. Maybe.

During the first half of 2022, surveys of consumers and CEOs showed they were worried about a recession coming on the heels of a 40-year peak in inflation and ongoing labor shortages. Many expected it to come in the second half of the year. In June 2022, consumer sentiment fell to a record low. Rising inflation, record gas prices and worries about personal finances contributed to a feeling of dread last matched during 2008’s Great Recession, according to data from the University of Michigan.

And then there was confusion over whether we actually were in a recession.

Tech giants Amazon, Meta, Google and Microsoft began announcing thousands of layoffs in late 2022, and the trend continued into early 2023 as other tech companies and employers followed suit. Surely that meant we were in a recession.

And yet, the United States was not actually in a recession. After the Fed raised interest rates several times, inflation decreased in December 2022 to 6.5%, down from 7.1% in November. Although Barkin said his preferred rate of inflation would be about 2%, he acknowledged the improvement in prices. Plus, the nation’s gross domestic product increased by 2.9% in the fourth quarter of 2022, following a 3.2% rise in the third quarter.

Economists and business leaders say there could still be a recession in the offing this year. Manufacturing and the housing market are already in recession, according to experts, and labor participation remains low in certain skilled-job sectors, including health care, public safety and cybersecurity. In January, Moody’s Analytics dubbed its 2023 outlook a “slowcession” — short of a real recession, but an economy in which growth comes to a near halt.

Meanwhile, mass layoffs — or even the threat of them — are changing the balance of power between employers and workers, many of whom received higher salaries and work-from-home allowances over the past two years during the U.S. labor shortage. Many labor experts agree that employee-friendly honeymoon is over, and in August 2022, a survey for Bloomberg News reported that 58% of respondents believed companies now have more leverage in the job market, a 5% increase from January 2022.

Another impact of layoffs is on workforce diversity, as more women and people of color have been laid off for a combination of reasons, including “last in, first out” policies that undo more recently made diverse hires, and remote work, which can leave employees with fewer allies among executives. Some advertisers also are backing away from more expensive buys due to economic concerns.

Virginia, in general, is in better economic shape than the nation as a whole because of reliable government contracting work. The commonwealth’s unemployment rate in December 2022 was 3%, a half-point down from the national rate, and Virginia gained 103,500 jobs between December 2021 and December 2022. 

Old Dominion University economists said in January that they don’t predict a recession in Hampton Roads because of an increase in defense spending. Instead, they expect the region’s economy to grow by a modest 1.7% this year. However, the state’s fiscal 2023 economic forecast from the Department of Planning and Budget expected a 4.6% unemployment rate in fiscal 2024, which begins July 1, after a slowdown in hiring in the second half of fiscal 2023. 

   

 

 

 

Barkin: To address inflation, U.S. must rethink labor

As the U.S. moves to a short-labor environment, it will be necessary for businesses, governments and nonprofits to reassess their approach to labor, Federal Reserve Bank of Richmond President and CEO Tom Barkin said Friday in Richmond.

Speaking at the Virginia Chamber’s 2022 Virginia Economic Summit and Forum on International Trade, Barkin said that although the nation’s unemployment rate has dropped back to levels last seen before the pandemic, workforce participation has not risen to pre-pandemic numbers. In November, the national participation rate was at 62.1%, down from 63.4% in February 2020.

Although the Fed has increased interest rates by 0.75 points four times this year to address the 40-year-high inflation rate, that did not dampen job growth. The U.S. added 263,000 jobs in November, according to the Labor Department’s Bureau of Labor Statistics payroll numbers released Friday. That’s about three times the break-even level of workforce growth, meaning the U.S. is still adding jobs faster than workers, Barkin explained.

“The result has been historic labor market tightness,” he said, particularly in skilled trades. The labor shortage, in turn, has contributed to inflation, Barkin said. The Personal Consumption Expenditures (PCE) price index, which measures the changes in the prices of goods and services compared to the same month a year ago, was at 6% overall in October, a near 40-year high.

“The unmatched outcome is fewer workers that would constrain our growth and pressure inflation — unless and until businesses and governments can deliver productivity enhancements [and] restructure incentives to bring more workers into the workforce,” he said.

By contrast, businesses had adapted to the growing labor force the U.S. experienced for decades, benefitting from the post-World War II baby boom, as well as other factors such as more women entering the workforce, more college-educated workers, better health allowing workers to live longer and historically high immigration levels. Businesses also benefitted from increased access to low-cost offshore labor over the past several decades.

Now, however, businesses must adapt to a labor shortage, Barkin said. “Employers are reconsidering working conditions, revising schedules and redesigning jobs to better match worker preferences.” Some, he noted, are partnering with community colleges to attract skilled trades workers.

Businesses also are taking active roles in reducing barriers to work by providing child care or housing support.

Within the Fed’s Fifth District (which includes Virginia, North Carolina, South Carolina, West Virginia and Maryland), a steel company has hired full-time recruiters and started its own soft-skills training program, and a poultry provider has dropped drug tests and background checks from its hiring process, he said.

Although the labor shortage has led some businesses to raise pay to meet market demands, workers still could be vulnerable, Barkin noted. Employers who raise pay will demand higher productivity or raise prices, which will lessen demand and, eventually, jobs. The U.S. could also see an increase in offshoring and automation that reduces staffing needs.

Learning from others

Governments and nonprofits should consider playing a role in broadening the labor supply, exploring policies that encourage workforce participation and preparation, Barkin said.

Case studies from other countries show possibilities. In 2000, Canada and the U.S. had similar percentages of women participating in the labor force. Now, Canada’s women labor participation has risen five points, while the U.S. has seen a decline of one percentage point. In 2020, the U.S. women’s labor force participation rate was at 56.2%.

Declining availability of child care led directly to some mothers leaving the U.S. workforce during the pandemic, according to a report released in April by the U.S. Chamber of Commerce, with 58% of all parents saying they left jobs because they couldn’t find or afford child care. Flexible work arrangements could ease pressure on parents, Barkin said, citing research from the Federal Reserve Bank of San Francisco.

Another factor in the U.S.’s labor shortage is a decrease in workers ages 55 and above, which had a higher labor force participation rate in February 2020 than they do today. If that population was at the February 2020 rate today, there would be 1.4 million more older workers.

The U.S. has an employment-to-population ratio of 56% for adults ages 60 to 64. In Japan, though, the employment-to-population ratio for workers ages 60 to 64 is at 70%,  a 19.3-percentage-point rise from 2000. Some of this depends on overall better health among the Japanese population, but an end to mandatory retirement at certain ages and the addition of training programs for employers hoping to hire and retain senior workers have also helped, Barkin said.

Meanwhile, limits on immigration during the pandemic have caused a 500,000-person decline in prime working age immigrants in the U.S., Barkin said, an issue he thinks the federal government should address. “It’s worth exploring things like increased legal immigration, which would bring those with skills, work ethic and entrepreneurship into our workforce.”

In short, it’s time for businesses, governments and even economists to reassess what they think they know about the labor market, Barkin said. “Increasingly, I worry that we’re moving to an environment where labor is short and not long. The situation can be managed — other countries have proven that — but it requires real intentionality.”

Editor’s note: This article has been updated to reflect the correct rise in Japan’s employment-to-population ratio increase among those ages 60 to 64 from 2000.