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Speaking of the Economy
Directional signs pointing in various directions
Speaking of the Economy
June 28, 2023

Where are the Region's Economies Heading?

Audiences: Business Leaders, Economists, General Public

Andy Bauer, Renee Haltom and Matt Martin share what their business contacts have told them about regional economic conditions in the Fifth District. Bauer, Haltom and Martin are regional executives at the Federal Reserve Bank of Richmond.


Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guests today are the Richmond Fed's three regional executives who oversee outreach efforts with community and business leaders across our region. Andy Bauer oversees Maryland, the Washington, D.C., metro area and West Virginia from the Richmond Fed's Baltimore branch. Renee Haltom covers Virginia from the main Richmond office and Matt Martin oversees North and South Carolina from the Richmond Fed's Charlotte branch.

Welcome back to the show everyone.

Andy Bauer: Thanks for having us, Tim.

Renee Haltom: Great to be here.

Matt Martin: Thanks.

Sablik: The three of you were last on the show back in August of 2022 to talk about economic conditions in the regions that you oversee. I think it's fair to say that a lot has happened in the economy since then.

Let's start with the big question. What have you been hearing from your business contacts about general economic conditions right now?

Martin: Overall demand is holding up well, though I think there are some signs that demand growth is finally slowing a bit. It's most obvious in those sectors that are affected by higher interest rates — auto sales or other big-ticket items like boats, big things you might put in your house like appliances or air conditioning systems. It's showing up in a few other places that don't necessarily mean consumer spending is falling.

Travel is an interesting one. Talking to some of our beach resorts in the Carolinas, they expect to be looking pretty well overall, as far as rooms rented and things like that, but off peak from last year. Part of that is because they're facing competition from overseas, particularly Europe. That's not a sign that consumer spending is falling overall; they're just replacing drive-to trips to the beach with flights to Europe. Those are things they couldn't have done a year or two ago. It's just a change in preferences, not really a sign of weakening demand.

Haltom: To add to that, lately, I've been hearing a sense of almost surprise from businesses that things are still as strong as they are. People seem to be waiting for the Fed's rate hikes to slow the economy.

For example, construction is slowing in some markets and backlogs are falling, but it's still hot in certain other places. People do expect it to be propped up by cutting infrastructure spending.

Matt mentioned interest-sensitive sectors like the housing market, but even realtors and builders report the activity has seemed to pick up a tiny bit very recently. And, housing supply is still fundamentally below demand, so maybe [there's] some anticipated strength longer term in that sector.

One of the more interesting things we've heard recently is how much the inventory correction is still distorting some of the aggregate data. Some firms are bloated with inventory because they over ordered when supply chains were frozen, but others are still scraping by for inputs. That may be confusing the picture and data series like industrial production.

Bauer: I'm hearing a lot of anecdotes from businesses similar to what Matt and Renee described. Overall, the picture is that you hear that the economy is slowing, beyond the sectors that were just highlighted. What's interesting is when you talk to people and you ask, "Things are slowing, but how much?" they'll say the level of activity is very solid.

You have to remember, for many businesses demand was exceptionally strong in 2021 and 2022. Now what we're seeing is that activity is slowing to pre-COVID levels of demand and orders. Many of the businesses I talked to will say that this level of activity is actually more sustainable, particularly given some of the challenges that they still see in the labor market.

I'd also note that there are some sectors that are still trying to make up for COVID-era supply disruptions — autos, light and heavy trucks, equipment. If you're a business with a fleet of cars or trucks, you've not been able to update [those] fleets with newer vehicles over the past couple of years. Manufacturers are taking orders for 2024. So you still have, in some parts of the economy, areas that are still very, very strong.

Sablik: Andy, you mentioned the labor market conditions. When we spoke last year, the big story was that many employers were having a hard time finding workers. What are you all hearing about labor market conditions right now?

Martin: Last year when we did this podcast, labor shortages were top of mind for pretty much every firm, and it was the thing they worried most about. Not surprisingly, wage and salary levels were rising pretty rapidly then.

Now, a lot of firms are telling me that staffing is much closer to their desired levels — not necessarily completely there, but they're much more comfortable about it. They're still hiring in some cases, but they feel like they can be more selective. They're much more sanguine about where staffing levels are now.

I don't hear that much about layoffs, though a few firms have told me they're not necessarily filling open positions that come about due to turnover. In that context, it shouldn't be that surprising that wage growth looks like it's moderating as well.

Bauer: I'd have to agree with Matt. It is really interesting how things have changed from last year to this year. You're definitely hearing more cases of firms saying that they're fully staffed. They might also say that they're seeing a significant improvement in the number of applications. And, importantly, firms are saying that they're feeling okay with where wages are.

The big story for the last couple of years was [it was] difficult to find labor, particularly for entry-level workers. So, firms are responding by really ratcheting up wages. Now, when you ask firms, they feel like they've got their wage rates about the right place. There are still some firms that say we've increased wages at one part of our pay scale, we now have to do some changes so that there's still some internal equity in terms of wage rates.

Having said all that, you still hear on occasion [about] instances where businesses are having a hard time filling positions. In skilled trades, I think it's still pretty much across the board. It was tough before COVID, it's tough now. I talk to manufacturers that almost fully staffed, but then others — this could be within the same company — there is one plant that's doing very well [and] there's a couple others that are still having issues.

I think there, it really goes to the nature of that local labor market as well as the nature of the work. Workers have really sat down and made a decision of what they're willing to do and for what wage rate.

Sablik: You both mentioned wage inflation. Generally, inflation was another of the big stories that we talked about the last time we spoke and it continues to be a big story. We're recording this on June 13, right on the heels of the latest CPI report, and it shows that inflation has come down since its peaks but still remains elevated.

What are you all hearing from your business contacts about inflation? Are they still planning to raise prices for customers, or are they still facing price increases themselves from their own suppliers?

Bauer: Over the last couple of years when we've talked with firms, it was a battle for margin. As firms were experiencing large and frequent price increases, [they had] to respond with increasing prices, sometimes multiple times a year, and some of those increases being quite sizable.

When I talk to firms now, it seems more often that I hear that pricing is back now to where margins are near or at pre-COVID levels. Despite the fact that costs might still be elevated relative to 2019, they feel more confident that input costs have stabilized. As a result, they're not anticipating having to raise prices as much this year, which indicates that we are in a good path going forward.

Haltom: Andy hit the nail on the head. Talking with businesses, there has been a real shift in the mentality around price increases. A lot of firms seem to feel like the heyday of really high COVID-era inflation is essentially over.

That doesn't mean we're back to 2 percent inflation overnight but that this idea of outsized price increases is not going to be quite as sustainable going forward. One way that manifests is the focus on market share more than margins, as Andy talked about.

Another way that it manifests is a shift in the expected frequency of price increases. It was pretty common last year to hear firms say that they raise prices to three times and at historic levels on their consumers. Some firms may have done an outsized price increase this year or at the end of last year, but they aren't expecting as many price increases this year.

Sablik: Shifting to some more recent economic developments, this spring was marked by some turmoil in the banking sector with a few high-profile bank failures. That stress, coupled with continued monetary policy tightening from the Fed, could constrain credit availability for businesses. What are you hearing from your contacts about their ability to take out loans right now?

Haltom: It's a great question and it's something we've really had our ears to the ground about, given what's happened in the banking sector in the last few months.

After Silicon Valley Bank failed, many people wondered if it would lead to broader banking sector distress and a pulling back of credit. Largely that has not happened. You hear from banks that deposits —although there had been some outflows — have largely been stable.

In terms of the banking business, credit quality still is excellent [and] loan demand is strong in many cases. I do hear some businesses express concern that banking headlines will hurt consumer sentiment, although that hasn't happened much yet. By and large, there hasn't seemed to have been a broader banking sector distress that is really impacting the economy.

But I would say you do hear about credit tightening. Interest rates have risen a lot. This not only makes borrowing more expensive for firms — and that can slow the economy — but it also squeezes bank net interest margins and forces them to find efficiencies to keep expenses down.

There are certain segments of commercial real estate — namely office and even to some extent multifamily development — where contacts repeatedly say that banks are just pencils down. You see banks wanting to be less exposed to those sectors given uncertainty around the future of office, for example, and concern that office real estate prices will fall. So, you hear comments like lenders are asking a lot more questions before extending credit or only lending to existing customers to preserve the relationship while not being willing to entertain new clients in the commercial real estate sector. 

The third place I'd say that there's some tighter credit conditions is a pullback in some riskier activity. There, I mean activities like venture capital, private equity financing. That seems not entirely unusual in this stage of the business cycle. It's based on a concern that things may slow down going forward.

Sablik: To close things out, I'll ask each of you to put on your forecasting hats. What are the biggest challenges that business leaders are expecting to face in the second half of this year?

Martin: As we've discussed, a lot of businesses are pretty sanguine about conditions right now. But that doesn't mean they have that same outlook when they project the rest of this year and into next year.

A lot of them have expressed some heightened uncertainty and an inability to see around the corner about what's ahead for their business. Some of this [are] concerns about where interest rates are — it's a cost to their business. They'd like to have some clear idea of when this tightening cycle is going to stop and start to reverse.

The other piece, as our president, Tom Barkin, frequently says this is the most talked about recession in history and it's not yet happened. Many of these business leaders think a further slowdown is bound to happen. So, they're trying to position their firms for an eventual slowdown and trying to figure out what that means.

What is interesting is that for many of them — maybe probably most of them — that's not going to lead them to lay off workers. They've worked so hard to get the employees they have, they're not in a rush to let go of them. They're going to try and find other ways to cut costs and trim and make their way through what they hope will be a pretty short and mild recession.

Haltom: In terms of outlook for the rest of the year, I'd really point to the consumer. The consumer segment has been extremely strong throughout the COVID era. But consumer-facing firms are now expecting that to end, at least to some degree.

There's a few reasons for that. One is that pandemic era transfers are drying up. Households are spending down the excess savings that they had built up through COVID. To the extent that labor markets weakened with a slowing economy, that could lead consumers to pull back, although as Matt says the labor market response may not be as great as it would be in a similar business cycle episode, given how short labor has been for the most part of the COVID era.

So, the outlook for consumers is something that's very much on the minds of businesses. The consumer-facing firms I've talked to expect consumers to be much more price sensitive going forward. While that might not be a great amount of fun for those firms, that is a good thing for the inflation outlook.

Bauer: I'd have to agree with everything that Renee just said. What I would add is just whenever you think about the outlook for the economy, you have to think about the risks. And there's still a significant amount of risk.

One is that, as you mentioned, the inflation report came out and inflation has been somewhat stubborn, you could say. While I expect inflation to moderate over the course of the year, that moderation can be slow enough even that could add some uncertainty with respect to policy, which would complicate the outlook for the second part of the year [and] make it more difficult for firms to plan [and] make investment decisions.

Another thing that Renee noted earlier was the impact of tightening of credit conditions on the economy in certain places. One thing that a lot of people are focused on is what's going to develop in the office market. Because people were slow to return to the office, you have a lot of office buildings which are not being fully utilized. As those properties are challenged from an income perspective, that's going to make financing those properties difficult going forward.

And then we still have issues overseas that can move in unexpected ways that could create challenges for the U.S. or the global economy.

Sablik: Andy, Renee and Matt, thank you so much for coming on today to share your perspectives on our economy.

Bauer: Thanks, Tim. It's been great.

Haltom: Looking forward to coming back.

Sablik: And as always, listeners who want to stay up to date on all the latest economic data and reports from the Richmond Fed can head over to our website,, where you can sign up to receive notifications when new content goes live. And if you enjoyed this episode, please consider leaving us a rating and review on your favorite podcast app.