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.
After navigating 2025's challenges, firms entered 2026 with cautious optimism. They felt more confident in their own resilience and half joked that the new year could not possibly throw as many curve balls as the last one. Through mid-January, this optimism, however, had not translated into major hiring or investment decisions. While firms felt more upbeat, they were still hesitant. You can read more about how firms began the year in January's "What Businesses Are Saying."
In this post, we explore how reported conditions have evolved since, drawing from conversations in early February to mid-March. Of note, most of our outreach occurred before the conflict with Iran began.
Momentum seemed to be picking up. Firms sounded more positive last cycle than in the prior period, especially in Virginia and the Carolinas. This was true even for some sectors that had recently seen relatively weak sentiment, such as manufacturing. Amid the momentum, however, there was still an air of caution — a sense of testing the waters. For example, some manufacturing firms reported they were looking to hire, but more so for temp than full-time workers. Other firms noted they were finally restocking after drawing down pre-tariff inventory but doing so at conservative levels. A manufacturing executive expressed the cautious optimism sentiment well: "What I'm seeing in 2026 is encouraging, but I'm still going to be a bean counter." Firms that have faced stronger headwinds, such as those in the Washington, D.C., metro area, continued to report flat to slowing momentum. The conflict with Iran revived uncertainty as the full impact on energy, byproducts, shipping, and more remained to be seen.
Lower-income consumers continued to spend, but not with any ease. Luxury and high-end offerings still performed best, especially hotels. Middle- and lower-income individuals appeared stretched and highly price sensitive; they were still spending but trading down when possible or turning to alternative financing options, such as buy now, pay later. Should even higher gas prices materialize, they could stretch lower-income budgets further. One CEO shared a vivid image to illustrate the degree of strain already present: individuals at grocery stores with calculators.
Broad hiring plans appeared unlikely to pick up soon. What would it take for firms to lean in on hiring? Most firms provided the same answers: lower policy volatility and considerably stronger growth. Firms didn't expect either, so they remained hesitant to hire. There were exceptions though. In Virginia, several firms planned to hire for idiosyncratic reasons, such as a recent merger, or due to sector-specific strength, such as strong demand in the data center or defense space. In the Carolinas, above average job and population growth allowed for above average hiring activity. The pickup in demand in manufacturing was also supporting new hiring in the Carolinas.
Layoffs largely remained off the table. Across the Fifth District, most firms were holding headcount flat or allowing it to drift down through attrition. Increasingly, however, turnover had fallen dramatically, making attrition a less useful lever for downsizing. Even so, layoffs remained rare. There were exceptions in the northern part of the Fifth District. A few firms in D.C., Maryland, and West Virginia felt layoffs were the only cost-cutting lever remaining; if margin pressure were to rise any further in the months to come, layoffs could be their only option.
Artificial Intelligence (AI) threatened new hires more so than existing employees. Contrary to recent headlines, it was rare for Fifth District firms to say they had reduced staff due to AI. Some firms even noted that AI has proved most effective when combined with institutional knowledge, making retention key. On the other hand, AI use cases have been expanding rapidly, and the hopes of what it could do in the near future seemed to have helped many firms slow down hiring.
Market share concerns started to outweigh urgency around cost recovery. An increasing number of firms expressed concern about losing customers. To defend market share, they were more conservative with price hikes. Some firms absorbed higher costs, while others skipped even regular price increases. More firms offered discounts and found ways to offer lower-cost options, such as removing features from a car or offering a cheaper pizza special with fewer toppings. Those that passed along costs did so with surgical precision, such as by targeting higher-end offerings only. They also closely tracked demand in response. If it were to fall, either due to the price hikes or an external factor such as climbing gas prices, those firms saw rolling back the price increases as an option.
Some cost pressures showed signs of stabilizing. Following the Supreme Court ruling on tariffs, effective tariff rates were lower for some firms, depending on their supply chains. Wage growth continued slowing. Some types of insurance — a major source of cost pressure in recent months — seemed to be leveling off, as well. Commercial property insurance was one example, while health insurance showed no signs of improvement and few firms expected costs to stabilize. As a result, a few firms were reluctantly cutting benefits or passing costs on to employees.
Productivity efforts yield tangible benefits. Many firms brought up productivity improvements on their own to explain how they were navigating higher costs, weaker pricing power, and reduced headcount. Many efforts depended on technology, but not always AI, to speed up tasks or improve processes. Increasingly, firms have shared concrete outcomes, such as a quantified decrease of in-store labor hours resulting from a switch to digital price tags.
This cycle, we'll continue to monitor how conditions evolve on both sides of our mandate. Do firms retain their optimism despite renewed uncertainty? Do overall costs continue to stabilize? Are firms able to find additional ways to hike prices? Does any impetus emerge to tip firms out of the low-hire, low-fire place they've been in for the last year? And finally, to what extent does conflict abroad upend any of these answers?
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.
From the end of 2025 through mid-January, businesses said they are increasingly confident but are still hesitant to make moves; the low-hire, low-fire equilibrium seems likely to continue.
Since the last FOMC cycle, businesses said growth has been solid, but narrow; the low-hire, low-fire equilibrium continues.
Conversations with businesses since the last FOMC cycle did not suggest any big shifts in the economy; economic conditions remained stable.
