What Businesses Are Saying: Steady Overall With Pockets of Stress

Through our economic sensing efforts, we meet with businesses across the Fifth District each month to understand current economic conditions. This provides us with real-time information on our regional economy. In this post, we draw from dozens of conversations with businesses from mid-June to mid-July.

Overall Momentum: Did Consumers Find Ways to Manage Higher Prices?

Demand proved durable, with "fine" being the most common descriptor. Largely, business-to-business (B2B) firms reported more solid demand growth than business-to-consumer (B2C) firms. Among consumer-facing firms, there was an uptick in reports of divergent spending trends between higher-income and lower- and middle-income consumers, with the former continuing to spend robustly while the latter struggled to stretch their dollars. Travel spending, for example, was strong even in non-World Cup cities, but it was mostly at luxury properties while economy brands were flat. A grocery store executive reported sustained foot traffic but smaller baskets among in-person customers. At the same time, grocery delivery orders, typically associated with higher-income customers, saw no change.

Consumers continued to manage higher prices via strategic choices and trade-offs. Several firms flagged ways that consumers were focused on near-term budgets as they managed cash flow. Consumers bought smaller packages at the liquor store on each visit, while at the hair salon, they kept the same services but extended time between appointments. When they faced issues with their cars or air conditioning, they opted to repair, even if replacement in a year was deemed inevitable. They strategized which bills to pay and when, paying some late but never late enough to default or face repossession. A few borrowed against their 401(k)s. Some grocery executives flagged that not all spending changes were due to finances; they noted a shift toward more health-conscious options, too.

Uncertainty continued to play a role in decision-making for some. Many firms described high uncertainty as the new baseline, which meant they needed to move ahead anyway with planning and investment. Some firms, however, reported a delay in investment decisions as uncertainty picked up again: They cited new tariffs and a resurgence of conflict in the Middle East. Others hesitated to invest without more certainty that present demand would stick around.

Labor: Did the Labor Market Show Any Signs of Moving Toward Hiring or Firing?

Most firms expected to keep headcount flat through the end of 2026. The majority of firms said they expected to be able to meet demand with current staff, either due to lackluster demand expectations or promising productivity improvements, both from artificial intelligence (AI) and non-AI. A minority of firms noted they expected flat headcount because they didn't foresee finding qualified, available talent to hire.

AI could lead to more hiring after initial rollout. One executive shared that they were planning to hire to take their AI rollout to the next level. They realized they needed staff with fresh ideas and well-developed AI skills, even if they require higher compensation. Several other firms noted that AI was moving from one-off projects to being woven in throughout the organization (e.g., to bolster cybersecurity).

Pricing: How Did Businesses Manage Cost Pressures?

Conflict-related cost pressures continued. Transportation costs, including shipping, freight, and trucking rates, remained elevated. Several contacts pointed out that fuel surcharges did not recede as gas prices did. The rising cost of AI also came up more frequently than in prior cycles.

Some customers were largely "numb" to cost inflation pass-through; others were highly sensitive. Several executives at B2B firms, as well as some at B2C firms catering to higher-income consumers, reported successfully passing on rising costs to customers. They met little resistance to 3 percent-plus price increases, as one contact noted that customers had "become largely numb." B2C firms that cater to lower- and middle-income consumers, on the other hand, were much less able to pass on higher costs to their customers.

The impact of tariff refunds is expected to unfold over time. Some firms received refunds on tariffs they had paid prior to the Supreme Court ruling. Firms that had very visible tariff-related price increases noted they felt little option but to share tariff savings with customers. A few other firms planned to observe customer behavior and wait and see how cost pressures evolved before they determined next steps, mirroring their behavior during the initial tariff roll-out.

Looking Forward: Where Are We Headed?

This cycle, we'll continue to keep a pulse on many of the same questions: Do consumers continue to find ways to keep spending, or does demand waver? Do firms move forward with investment or hiring, or does renewed uncertainty keep them cautious and steady? Do firms continue to face elevated cost pressure, and if so, do they raise prices, cut costs or accept smaller margins?

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.