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 supplements data to inform our view of the national and regional economy. In moments of more limited access to data (e.g., a government shutdown), economic sensing becomes an even more crucial input; it allows us to keep a pulse on the economy. In this post, we draw from dozens of our conversations with businesses from mid-September to mid-October.
Economic conditions remained stable. Conversations with businesses did not suggest any big shifts in economic conditions from the prior cycle. The cut in the federal funds rate at the September Federal Open Market Committee meeting did not seem to have materially changed the business calculus for most of our business contacts. Instead, they pointed to other factors that impacted their decisions, like enduring high uncertainty and longer-term rates. A few banks reported a pickup in loan demand that may have been aided by the Fed's September rate cut.
Demand was okay, but mixed under the surface by geography, sector, and household income. Reports varied among sectors and regions, with infrastructure-related sectors (e.g., transportation, energy), data centers and the Carolinas continuing to impress while areas like agriculture, certain manufacturing segments like furniture or apparel, and the Washington, D.C., metro area faced considerable challenges. Even as spending remained steady, firms continued to flag concerns about the financial health of low- and moderate-income consumers. Businesses that cater to higher-income consumers continued to see "surprisingly" strong demand, but they flagged that these consumers seemed vulnerable to asset fluctuations, with sales seemingly declining each time the market dipped.
Effects of the government shutdown appeared limited at first. During our conversations last cycle, which ran through mid-October, most firms did not note much impact. Directly affected firms, such as hotels throughout the district that rely on government travel or tourism, dining, and other service providers in the D.C. area, reported some impact, with small businesses feeling the most pressure. They, however, recognized they'd been through similar situations before and were, for the most part, calmly waiting for it to pass. A few contacts shared some concerns about the unique aspects of this shutdown that could result in larger impacts, such as reductions in force or potential consumer pullback due to fear of not receiving back pay or loan implications if the shutdown continues for a long time. The shutdown, combined with new proposed tariffs, increased the sense of uncertainty for businesses. Of note, as of our publication date, effects are emerging more quickly; more businesses are expressing concern about the implications of missed government paychecks and transfer payments.
Even those with impetus to hire were dragging their feet. The low hiring, low firing equilibrium continued. Companies that were hiring were being more cautious, holding more rounds of interviews and taking longer to make hiring decisions. A few staffing firms reported that temporary hires, or "temps," increased as a way to avoid permanent hires. In the Carolinas, where more firms reported a need to hire to meet current or projected demand, businesses were still hesitant to add staff given the high-risk environment and high level of uncertainty.
At the same time, firms with more labor slack remained hesitant to lay off. A few firms reported they had to find work to keep staff busy or that they would have to grow substantially before they would need to hire. Still, they did not want to find themselves short-staffed like during the post-COVID-19 labor shortages, so layoffs remained low. Downsizing continued to occur primarily through attrition.
Artificial Intelligence (AI) is a player in 2026 game plans. Firms noted that AI, along with other technological developments, was helping to improve productivity on the margin. A few firms reported that it had helped reduce the need to backfill vacancies and thus allowed some of them to trim their hiring forecasts for the upcoming year.
Tariffs pressured prices but were not alone. Tariffs continue to dominate most discussions of costs, but insurance was mentioned increasingly as a reemerging cost pressure. This includes health care, but also workers' compensation, general liability, property, and other coverage types.
Firms continued to roll out tariff pass-through with consumers. Firms earlier in the supply chain felt more ability to pass on tariff costs. While far less of the tariff costs tended to make it to the consumer, firms continued to slowly roll out these costs and reported they had generally been tolerated by consumers. However, there was concern that a "choosy consumer" will hit a ceiling on what they're willing to accept, and pass-through will eventually come at the expense of lower demand. To protect margin without hiking prices much, firms were looking to cut costs by investing in productivity, seeking cheaper sourcing alternatives, or eliminating certain product offerings altogether. As an additional wrinkle, low inventories heading into the holiday season — due to low holiday ordering in the spring when tariffs were first rolled out — meant firms expected fewer holiday discounts than usual.
As we continue to have our conversations with businesses in these next few weeks, we'll look to gauge: Are firms gaining confidence in their 2026 plans? Are the recent rate cuts spurring activity in interest-sensitive areas? Are we seeing continued inflation pressure beyond known tariff effects? Is the low hiring, low firing approach set to continue?
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.
Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.
