What Businesses Are Saying is a series within Regional Matters that highlights our business outreach in the Richmond Fed's district. The post is published eight times per year on the day that the Federal Open Market Committee (FOMC) blackout lifts each cycle.
On-the-ground sensing helps us to understand the state and trajectory of the economy, especially when data are limited. It also allows us to better gauge how pressures on each side of our dual mandate — maximum employment and stable prices — are evolving. In this post, we draw from dozens of conversations with businesses throughout November.
Solid demand appeared to disproportionately stem from high-income consumers and artificial intelligence (AI). Businesses that sell to high-income consumers continued to report strong spending, while those that sell to low- and moderate-income consumers noted flagging demand growth — with trade downs and trade offs common — and more consumers putting off big purchases. Firms tied directly or indirectly to AI and data centers saw relentless demand, which at times more than offset weakness in other parts of their businesses. Several sectors reported doing less well, including higher education, nonprofits, coal, oil and gas, agriculture, chemicals, and real estate. In addition, the Carolinas continued to see more broad-based solid demand than other parts of the Fifth District.
Firms were hesitant to lean in going into 2026. Some firms noted orders and backlogs going into 2026 looked too light to support growth-oriented investment. Others that reported more convincing demand still hesitated to lean in due to a slew of worries. Uncertainty was a common concern, specifically around policy and federal spending decisions, the consumer's ability to continue spending (due in part to anticipated increases in health care costs), and the durability of the AI boom. When discussing structure investments, several contacts shared that it felt nearly impossible to make new projects work even when demand otherwise warranted expansion. They pointed to interest rates, tariffs and material costs, labor availability, and crowding out from AI-related construction.
Government shutdown dampened sentiment, and perhaps demand, beyond the D.C. metro area. Some contacts saw reduced foot traffic during the shutdown and an uptick upon its conclusion. Others noted choppy, more volatile demand throughout its duration. The D.C. metro area saw the most acute impact, but slowdown reports came from other corners of the Fifth District as well, such as from a furniture store in southwest Virginia and a restauranteur in southeast Virginia. A boat dealer in the Carolinas, whose customers tend to be affluent, reported trade downs. For example, these customers still made purchases but opted more often for used boats, presumably out of caution.
Rate cut impact seemed marginal at best. Few businesses brought up the Fed's recent interest rate cuts as a factor impacting decisions. The cuts did not seem to move the needle much for homebuilders, in part because longer-term rates stayed elevated and construction costs still made the math challenging for new projects.
Labor availability improved, but mismatches continued. Many employers expressed relative ease in finding and retaining workers. Even so, several noted that mismatches led to a continued sense of labor tightness: It remained difficult for firms to find the right workers with the right skills in the right place. This was particularly true in the skilled trades. Others pointed to housing availability and affordability as a source of a geographic mismatch between available jobs and workers. Some firms, particularly those in rural markets or those offering relatively low pay or more challenging working conditions, still saw labor availability as an issue.
There were no signs either hiring or firing would pick up soon. There was an uptick in high-profile layoffs in the news this cycle, but Fifth District contacts expressed little desire to lay off (or hire) additional workers. Only a handful of contacts — all in sectors with particularly weak demand or idiosyncratic challenges — mentioned the possibility of increased layoffs.
AI expanded capacity at a few firms. A few contacts shared that AI allowed their firms to accomplish substantially more with the same number of people, particularly in staffing, finance, marketing and procurement. For example, one staffing firm redeployed recruiters to work in sales by deploying AI for their original tasks. A payroll firm grew sales by double digits without increasing headcount. Speculation about AI's future capabilities led to increased hiring hesitancy, with firms thinking twice before rushing to backfill some positions.
Firms saw little relief on the cost front. Increasingly, contacts focused on pressure from rising non-tariff costs, with utility and insurance mentioned the most. Insurance cost increases went beyond health insurance to property, liability, and other types of coverage. Tariffs were still mentioned: Pre-tariff inventory stockpiles dwindled, and several firms felt they had exhausted available tariff workarounds. This created a sense among impacted firms that tariff effects on the economy were about to become more evident.
Consumers offered little wiggle room on the price front. Several consumer-facing firms shared that, even in the face of cost pressure, they could not raise prices further or they would lose customers; they emphasized that consumers continued to trade down and trade off. Firms that sell to businesses rather than directly to consumers saw more room for pass-through.
Margin pressure increased. With little ability to raise prices, a few firms shared they were trying harder to negotiate down vendor prices to reduce costs. Several, however, acknowledged the lack of wiggle room on both cost and price was squeezing margins, which was in turn leading to limited hiring that could continue into 2026.
In our upcoming conversations with businesses, we'll continue to sense whether pressure is increasing or decreasing on either side of the Fed's dual mandate. As we move into 2026, are businesses moving closer to either more hiring or more firing? Are firms able to pass-through cost increases or is consumer pushback squeezing margins? Are interest rate cuts moving the needle any in interest-sensitive sectors?
Combined with widely available data, our in-house surveys, and the Beige Book, this on-the-ground sensing will help shape our understanding of the economy today and where it is headed.
