What Businesses Are Saying: The Impact of the Conflict Has Been Limited ... For Now

In times of rapid change, economic sensing allows us to quickly determine how events are playing out in the real economy. In this post, we draw from dozens of conversations with businesses from mid-March to mid-April to assess how the first seven weeks of the conflict in the Middle East impacted businesses and consumers.

Overall Momentum: Did the Conflict Cause Businesses or Consumers to Pull Back?

Firms demonstrated patience amid uncertainty. Business leaders shared that increased policy uncertainty over the last year had taught them to calmly wait and see. This meant paused investments for some, as they waited to see how the conflict would impact supply chains, input costs and demand.

Consumers continued to show resilience. Firms flagged a few cases of stress among middle-income consumers. Beyond that, however, firms were surprised at the lack of demand response to the conflict in the Middle East. Consumers kept spending even as they faced sharp price increases at the gas pump. These reports came from firms across sectors: retail, travel, manufacturing and banking. Some firms posited that larger tax refunds may have cushioned extra expenses. Big-ticket items like washers and dryers, which often reflect consumer confidence, saw negative impact. There were also a few reports of homebuying deals that fell through.

Labor: Did the Low-Hire, Low-Fire Equilibrium Show Signs of Breaking in Either Direction?

The low-hire, low-fire equilibrium lived on. Multiple firms, especially in manufacturing, noted they planned to grow, but with flat headcount. These firms did not plan to boost hiring even as their demand outlook improved. Largely, firms anticipating margin pressure amid price sensitivity and higher costs noted they were not planning to lay off workers. A few firms were reviewing staffing levels to restructure costs. In line with recent trends, firms in the Carolinas, those dependent on skilled trades, and those in rural areas reported more limited labor availability.

Glimmers of hope emerged for new graduates - but weren't ready to crystallize. Several firms in the Virginia region noted that for long-term success, they may need to restart entry-level hiring. They said it was not an immediate need but a growing concern. With a wave of retirements in the near-term horizon, firms recognized the importance of planning for overlap and knowledge transfer between young and tenured talent. Young workers, who are expected to be savvier with artificial intelligence, should prove helpful to firms; however, that savviness is expected to need industry and institutional knowledge to supplement it.

Pricing: How Did the Conflict Impact Costs and in Turn, Prices?

Input costs increased and were expected to rise further over time. Most of the conversations around cost increases focused on fuel. Many firms reported fuel surcharges - many higher than initially expected - following the onset of the conflict in the Middle East. Some firms successfully hedged against oil shocks, which allowed them to avoid the impact for at least some time. Along with fuel, firms flagged rising freight and packaging costs, as well as initial repercussions from supply constraints on key inputs.

Firms also reported more cost increases in the pipeline. They noted that weeks of missed shipments of key inputs such as oil, aluminum, helium and urea, would likely mean higher prices and even shortages that could hinder production. Firms flagged that infrastructure damage in the Gulf would also mean an extended period of reduced supply regardless of the conflict's duration. Restocking of key inputs once trade moves easily might also drive up prices, especially if firms look to reduce future risk by maintaining higher-than-normal inventory levels. They shared that the final round of cost increases may not be seen for some time, given that inputs bought today might result in a more expensive final product months from now. Produce grown with today's higher fertilizer prices, for example, might equate to more expensive groceries in several months.

Pass-through depended on firm characteristics, such as firm type and size. Business-to-business firms planned to continue to pass along higher costs. Business-to-consumer firms shared they were more hesitant to pass along costs given perceived high price sensitivity among consumers. They planned to test demand and find ways to raise prices where possible but didn't expect full pass-through. Large firms, in particular, reported success in cost sharing with suppliers; they were also more likely to have hedged against fuel prices. Small businesses lacked negotiating power, were less likely to have hedged, and felt squeezed.

Looking Forward: Where Are We Headed?

This cycle, we'll continue to monitor how the conflict impacts consumers and businesses alike. Do consumers continue to find ways to manage higher prices, or do they show signs of increased strain? Do cost pressures intensify or ease for businesses, and to what extent are they able to pass them along? How do firms deal with margin pressure, and how does that impact hiring and layoff decisions?

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.