Fed sees slight economic growth in Southeast

The Federal Reserve’s Fifth District — a region encompassing Virginia, Maryland, North Carolina, South Carolina, Washington, D.C., and most of West Virginia — posted modest economic growth in recent weeks, with consumer spending and commercial real estate activity picking up even as auto and boat sales fell, manufacturing softened and housing slowed, according to the latest edition of the Fed’s Beige Book, released Thursday.

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 Fed executives, as well as information collected from business contacts, community organizations, economists, market experts and other sources. The January edition is an update from the Fed’s Nov. 26 report.

According to the recent Big Book edition, employment in the Fifth District remained unchanged, with most of the Fed’s sources focusing on navigating business uncertainty rather than expanding their workforces. Other firms that were trying to hire struggled to find workers with the necessary skills, such as a repair shop expanding into new locations that could not find qualified candidates despite offering above-market compensation packages.

However, employers reliant on highly skilled workers faced pressure to raise their employees’ pay. Overall, the Fed reports that wage growth is essentially back to pre-COVID levels.

According to the Fed’s recent surveys, service sector firms reported year-over-year price growth of around 3%, while manufacturers reported a 5% surge in prices compared to last year.

The Fed reported that manufacturers saw non-wage input costs rise roughly 6 to 7% year over year, citing tariffs as a leading contributor. In addition, several firms across various industries cited rising energy and health insurance costs, adding to overall cost increases.

The Fifth District’s manufacturing activity declined slightly, with one defense contractor reporting significant revenue decreases from the fall government shutdown, with effects expected to persist well into the new year. The Fed noted that tariffs are also impacting businesses and eating into their margins, with a mounting systems producer paying 80% tariffs and a small perforator spending nearly $200,000 on imported equipment tariffs.

However, some manufacturers experienced fewer tariff impacts than anticipated. Some absorbed the additional costs, while others passed them on to customers.

The Fifth District’s overall cargo volumes at maritime ports remained flat since the last cycle. Spot rates remained low as customers placed smaller orders amid uncertainty about consumer demand. Loaded exports rose slightly in the district, but fewer empty-container exports raised concerns about near-term import levels.

Truckload volumes remained at record-low levels that have persisted throughout the year. However, increased regulatory scrutiny of commercial driver licensing put some upward pressure on spot rates, as brokerage firms had a harder time matching carriers to customers.

The Fed reported that consumer spending increased in the recent reporting period, with some retailers seeing increased sales and shopper traffic over the holidays, while others saw sales decline, partially due to adverse weather conditions.

Auto and boat dealerships reported a decline in sales, largely due to seasonal factors. However, the Fed reported an overall modest increase in tourism and travel consumer spending. While hotels and event venues in North and South Carolina saw increased activity during the holidays, sources in Virginia reported weaker travel and tourism spending during that time due to poor weather and reduced business travel in the Greater Washington area.

The residential real estate market saw its usual winter slowdown. However, employment uncertainty among federal and contract workers in Northern Virginia and the D.C. area led to real estate deals being paused or upended until there was more clarity.

The Fed said buyer traffic declined while listings continued to grow, but most agents said they were optimistic that spring would see strong activity. The Fed reports that potential buyers are continuing to wait for rates and home prices to come down and that builders in some markets are concerned that tariff impacts will eventually hit consumers, causing them to reassess new starts this year.

On the other hand, commercial real estate activity increased slightly, with sources saying they tried to close deals before the end of the year, but securing quality buildings was getting harder as Class A office space was limited.

“Clients are starting to take up Class B space only if they are in a Class A location,” said a broker from Virginia.

Financial institutions continued to report stable loan demand. Demand was primarily concentrated in the commercial real estate and consumer portfolios. While deposit levels remained stable, institutions reported modest increases in delinquent loans.

Nonfinancial service providers continued to see stable demand for their services but raised concerns about economic uncertainty, with one firm noting that clients were unsure how to budget for the upcoming year and another saying that clients were hesitant to make long-term commitments.