Federal Reserve Bank of Richmond · Beige Book

Federal Reserve Bank of Richmond

Summary of Economic Activity

The Fifth District economy grew at a modest rate this cycle. T1Consumer spending on retail goods increased modestly while spending on travel and tourism increased moderately. However, auto and boat sales declined in recent weeks. T2Manufacturing activity declined slightly as many in the industry continued to struggle with challenges around tariffs. T3Residential real estate activity declined modestly while commercial real estate activity picked up slightly as firms looked to close deals by the end of the calendar year. Financial and nonfinancial services demand was unchanged this cycle. Employment remained unchanged as most firms kept head counts level and wage growth remained moderate. Prices continued to grow at a moderate year-over-year rate, overall, despite a surge in price growth in the manufacturing sector.

Labor Markets

Employment in the Fifth District remained unchanged in the recent period. Most contacts focused on navigating business uncertainty rather than expanding their workforce. Some firms attempting to hire continued to struggle to find workers with the required skills. For example, a repair shop expanding to new locations could not find qualified candidates despite offering above-market compensation packages. T4A motorcycle retailer and a home builder were allowing natural attrition to reduce their workforce and did not expect to replace departing workers until demand increases. Contacts reliant on highly skilled workers continued to face wage pressure. However, overall wage growth was largely back to pre-COVID levels. A recruiting firm reported that applicants were adjusting their salary expectations due to firms pushing back on their requested salaries.

Prices

Prices continued to grow moderately, on balance. According to our most recent surveys, service sector firms reported year-over-year growth in prices received at around three percent. T5Manufacturers, however, reported a surge in price growth with prices up about five percent compared to last year. Manufacturing firms reported non-wage input costs increasing by about six to seven percent year-over-year, with tariffs being one of the most cited reasons for the rising costs. Several firms across industries also cited rising energy and health insurance costs adding to overall cost increases.

Manufacturing

Manufacturing activity declined slightly in the latest reporting period. A defense contractor reported significant revenue decreases from the government shutdown, with effects expected to persist well into the new year. Tariffs continued to affect businesses and eat into margins. For example, a mounting systems producer was paying 80 percent tariffs, while a small perforator spent nearly $200,000 on imported equipment tariffs. Despite recent tariff relief, a coffee manufacturer expects prices to remain high as shortages due to poor growing conditions have led to historically high commodity prices. Some manufacturers reported fewer tariff impacts than feared. Some were able to absorb costs while others were able to pass them along to customers.

Ports and Transportation

Overall volumes at Fifth District maritime ports remained flat since last cycle. Contacts at ports anticipated a slowdown through the end of the year and spot rate prices remained low as customers continued to put in small orders as a way to ride out uncertainty in consumer demand. Loaded exports were slightly up across the District, though a notable decrease in exports of empty containers gave port contacts pause about near-term import levels. T6Truckload volumes saw no increase from the record low levels that have persisted throughout the year. One trucking firm noted that increased regulatory scrutiny on CDL licensing put upward pressure on spot rates as brokerage firms had a harder time matching carriers to customers.

Retail, Travel, and Tourism

Consumer spending increased modestly this cycle. Reports from retailers varied with some seeing increased sales and shopper traffic over the holidays while others saw sales decline due, in part, to adverse weather conditions limiting their hours or days open. Auto and boat dealerships reported declines in sales this cycle, some of which was expected due to the seasonality of car and boat shopping. Consumer spending on travel and tourism increased moderately, overall, but varied across our region. Hotels and event venues in North and South Carolina saw increased activity around the holidays. Contacts in Virginia, on the other hand, saw weaker than expected spending on travel and tourism due to several factors including adverse winter weather and low business travel, particularly to the greater Washington, DC area.

Real Estate and Construction

Residential real estate markets experienced a typical winter modest slowdown. In addition to the seasonal slowdown, employment uncertainty among federal and contract workers in the greater Washington, DC area has caused a pause or even upended deals until there was more clarity. Buyer traffic was down while listings continued to grow. Most agents were optimistic that spring would have good activity. Potential buyers were not having issues qualifying for loans but continued to sit on the sidelines waiting for rates and home prices to come down. Builders in some markets voiced concerns that tariff impacts will finally hit consumers, causing them to reassess new starts this year. Other markets, such as Greensboro, North Carolina, were keeping large housing projects on track.

Commercial real estate activity increased slightly as contacts looked to close deals by the end of the year. Agents were "cautiously optimistic" going into 2026. The flight to quality was still happening but 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. Retail activity was limited as most retailers don't typically change space around the holidays, but agents expected activity to return strongly in the spring. Multi-family activity in most areas slowed and vacancies rose.

Banking and Finance

Financial institutions continued to report stable loan demand that some institutions noted was tempered by seasonal fluctuations. Demand was primarily concentrated in the commercial real estate and consumer portfolios. One institution noted home equity loan demand was being driven by borrowers' desire to not "separate" from their existing first mortgages and choosing to improve their current home. Deposit levels continued to be stable with competition easing for balances due to lowering rates. Institutions continued to note modest increases in delinquent loans and one credit union noted that consumers' credit worthiness was showing "challenges" as consumers apply for new credit.

Nonfinancial Services

Nonfinancial service providers continued to report stable demand for their services, but economic uncertainty remained a challenge for the sector. T7A publishing firm noted that this uncertainty flows down from their clients as the clients are unsure of how to budget for the coming year. An IT support firm also reported that there was a "hesitation" toward long-term commitments for their services. A professional services firm stated that they are seeing increases in the costs of services they use "across the board" and these increases were "pinching" them because they are unsure if their clients would accept further price increases.

For more information about District economic conditions visit: https://www.richmondfed.org/research/data_analysis.