Fed’s Fifth District shows modest economic growth

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew modestly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released May 29.

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. The May release is an update from the Fed’s April 17 report.

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

Employment in the Fifth District grew moderately over the last reporting period. The availability of labor varied between industries. One seasonal outdoor recreational company reported it hadn’t been able to recruit some candidates because of the area’s lack of affordable housing. Many respondents listed a need for “quality” workers, and companies continued to increase wages and offer bonuses as part of their recruitment and retention efforts.

Price growth increased slightly this period, although the year-over-year rate remained moderate, according to the Fed. The growth in prices received by service providers remained high at around 4%, while manufacturers had a roughly 2.5% increase in prices received. Input and labor costs continued to rise for businesses in both sectors. In some cases, customers pushed back on additional price increases, so input costs increased faster than prices businesses received. Companies expected growth in prices received to moderate over the next six months.

Fifth District manufacturing activity was unchanged in recent weeks. Several firms cited increased pressure on margins because of global competition, and future market uncertainty has made several businesses uneasy. One textile company’s clients said they were not making long-term strategic decisions, which makes it difficult for the company to plan for the rest of the year.

Virginia and South Carolina ports reported to the Fed moderate to strong — up to double-digit — increases in imports, beyond the volume they picked up from diverted Baltimore cargo. Exports of commodities like textiles and apparel rose, while exports of agricultural goods flattened or decreased. Freight rates increased, and ocean carriers continued to add surcharges and fees for distance and hazards to compensate.

Inland ports had strong demand for rail transport, continuing the record levels seen this year. Auto, auto part, and agricultural equipment and tools manufacturers have preferred rail because of its lower carbon emissions and supply chain reliability, according to the Fed. Trucking volume in the Fifth District was up slightly, but spot rates continued to “spiral downward” because of oversaturation.

Consumer spending on retail and travel increased moderately this reporting period. Although sales were up, some retailers reported tighter profit margins caused by rising input costs that they weren’t able to completely pass along to customers. New vehicle sales declined slightly.

Restaurant and leisure travel picked up, largely from customers with discretionary income, while low- to moderate-income consumers pulled back on spending or trading down in the goods they bought.

Fifth District residential real estate activity picked up modestly in the past few weeks. Total closed sales increased. The total supply of homes for sale increased as more came onto the market, but supply remained below pre-pandemic levels. Average sales prices rose modestly, and homes sold at a slightly faster rate — particularly low- and mid-priced homes. New construction grew in areas with population growth.

Commercial real estate activity increased slightly. Retail leasing picked up; vacancy rates stayed low, and new inventory was absorbed quickly. Leasing for Class A office buildings increased slightly, but leasing for Class B and C properties declined. Leasing and absorption in new multifamily buildings were strong. Construction of existing projects continued, but developers said few new projects were greenlit because high interest rates and the continued high prices of material and labor made it difficult for deals to be financially viable.

Fifth District financial institutions continued to see a “modest softening” of loan demand, mainly in their commercial real estate and business loan portfolios. Most cited higher interest rates as the reason for softening demand. Deposit levels declined modestly, and competition continued for available balances. Loan delinquency rates remained stable.

Nonfinancial service providers reported that demand for their services and their revenues continued to be stable. Firms noted higher interest rates as a limiting factor for new capital expenditures, and some noted inflation and election-year politics as limiting factors for business expansion and for confidence in the economy. Wages and workforce issues continued to be less of a challenge and to modestly stabilize.