What Businesses Are Saying: Activity Up, but Expectations Mixed

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The Richmond Fed is an on-the-ground Reserve Bank. Our economic sensing team is constantly in the Fifth District, meeting with firms across industries to put together - piece by piece - a picture of where the economy stands. With the help of a robust network of business leaders willing to share what they're seeing, thinking and planning, we can get a regular pulse on the economy and check in on specific sectors as needed on an ad hoc basis.

On-the-ground sensing provides critical information toward our real-time understanding of the economy. Sensing is a supplement to our in-house surveys and national and regional data, the latter which often come in late and are revised multiple times. Sensing helps us move beyond "what" is happening to the "how" and "why," which provides us with a better idea of how enduring or impactful a trend will be and allows us to catch real-time turning points in the economy. These efforts help inform our Beige Book report but are broader and occur through business relationships built over time by our sensing team. You can read more about the value sensing offers the Fed in the latest issue of Econ Focus.

In this post, we draw from dozens of our conversations with businesses from early August to early September.

Overall Momentum: Activity Increased Somewhat, But Expectations Remained Mixed

Summer ended better than it began. In general, consumer-facing businesses seemed pleasantly surprised by July and August. After a rough go in May and June, expectations of the consumer had been low. However, even with a better-than-expected end of summer, businesses remained skeptical that the pickup in activity marked a turnaround. They expressed enduring concerns about the health of the consumer, especially given a perceived increase in price sensitivity.

Uncertainty may sting less over time. Uncertainty diminished somewhat over the last few months (e.g., tax bill passed). For some, that still was not enough clarity; they continued to hold off on investments. For others, the narrowing of the range of potential outcomes helped. They noted that they could only delay decisions for so long and had to proceed in the absence of a negative signal. This contributed to a feeling that activity increased. As one firm said, "You add a tariff clause into contracts, accept the risk above some ceiling and ask customers if they're comfortable with that. What else can you do?"

Some fared better than others. The spread of experiences businesses shared in August and early September was greater than typical. Some reported solid activity, while others told tales of real struggles, with most falling somewhere in between.

• Geography: In general, the southern part of the Fifth District, particularly South Carolina, reported more solid activity, while the northern part, particularly the Washington, D.C., metro area, reported more weakness.
• Target clientele: As has been the case for awhile, businesses serving lower-income consumers were having a harder time: They reported ongoing cutbacks, delays, and elevated distress among customers. In contrast, those selling to higher-income clientele, such as golf courses and special event apparel, reported solid spending. Notably, however, there were some mentions of choosiness and trading down even among higher-income customers and for luxury goods. For example, a higher-end salon shared that traffic was steady but skewed toward lower-level stylists, and a jewelry maker noted the usual coastal boost in demand attached to summer travel didn't occur this year.

Labor Markets: Hiring Was Easy, Finding a Job Not So Much

Workers are available, mostly. Low hiring and low turnover continued. More employers noted that labor availability was good, with plenty of qualified applicants per vacancy. Mentions of a balanced labor market even came up in a rural community, which has been rare. Notably, some contacts who had lost a considerable number of workers to immigration actions were fairly easily able to replace some lost labor with new hires (combined with productivity investments). There were some exceptions: Firms in South Carolina and sectors like manufacturing that require specialized, in-demand skills still flagged labor shortages as a problem.

Headcount is top of mind, wage growth less so. It remained common to hear that companies were reducing headcount via attrition to align with higher costs and/or lower demand. Layoffs remained rare. A few companies in different sectors mentioned needing to further align labor with future margins, which they anticipated will be lower. For example, a health care institution noted anticipated revenue squeezes in 2027 and 2028 would require lower costs starting in 2026. While wage growth remains above pre-COVID-19 rates, with many firms seeming to hover around 4 percent, firms rarely mentioned it until asked and seemed mostly comfortable with that pace given productivity gains in addition to cost of living adjustments over time.

Pricing: Passthrough Is Coming, So Is Customer Pushback

Tariffs dominated discussions about cost, but they weren't alone. Many impacted firms noted they had not yet increased prices due to tariffs for a variety of reasons, such as built-up inventory, but they would soon need to raise prices. Tariffs weren't the only cost challenging their operations and margins; several contacts mentioned increases in other costs, such as property and health insurance, that would require some eventual passthrough.

Pushback to passthrough seen as probable. Many impacted firms anticipated that they'd see hits to volume as a result of price increases but saw no other choice. Consumer-facing firms reported seeking strategies to mitigate demand destruction, including rolling out price increases more slowly. Some restaurant chains felt particularly squeezed, unable to pass on costs. To remain competitive, they felt pressure to provide value options or even lower prices.

Looking Forward: Where Are We Headed?

As we continue talking to businesses, some of the questions we'll look to answer include: Are firms' longer-term plans becoming clearer? Does the recent rate cut change their calculus on investment or employment? How much of their cost increases have they passed through already, and how much is still in the pipeline? How is the customer reacting to price increases? Are they absorbing any increase in price by spending more or making trade-offs?

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.