What Businesses Are Saying: Surprisingly Solid Demand but Signs of Strain Persist

Economic sensing provides us with real-time information on business and consumer decisions. These insights help us regularly keep a pulse on the economy, and they are particularly helpful in times of economic change, such as during the conflict in the Middle East. In this post, we draw from dozens of conversations with businesses from early May to early June.

Overall Momentum: Facing Higher Gas Prices, Did Consumers Pull Back Elsewhere?

Demand held up broadly, along with concerns over its sustainability. Many firms shared that recent spending patterns continued, with consumers spending but trading down. Some firms offered likely explanations for stable demand despite high gas prices; for example, hospitality executives in the Carolinas pointed to movement away from international travel given elevated flight prices. Many others, however, expressed surprise and even confusion at the continued resilience. One executive noted, "We keep expecting to see a big correction with the American consumer ever since COVID-19. And we haven't." Another shared they continued to watch the consumer to see when they "finally pull the ripcord." Several firms questioned what would happen to demand as tax refunds dwindled.

Signs of strain continued to gradually emerge among consumers. For most firms, sustainability concerns stemmed largely from consumers facing mounting challenges in recent years rather than specific signs of consumer weakness. Some firms, however, did point to specific signs of strain. Several consumer-debt executives flagged that more consumers were strategically delaying their payments - taking longer to pay back debt while doing so in time to avoid defaults and preserve credit scores. A few firms shared examples of consumers dragging their feet on big-ticket items or travel, which had resulted in more last-minute bookings.

Labor: Facing Higher Costs, Did Firms Look to Labor Cuts for Relief?

The labor market remained steady, with a slight lean toward hiring on one-off cases. Most firms reported plans to keep headcount steady through the end of the year. For some, demand was either flat or not strong enough to justify expansion. A few firms planned for growth without any additional staff, thanks to expected productivity improvements. As in previous years, firms dependent on skilled trades faced a unique issue: They expected headcount to remain flat due to a lack of qualified talent to hire.

Many of the firms that expected headcount to increase by the end of the year pointed primarily to one-off, strategic reasons (e.g., artificial intelligence (AI) adoption, reorganizations). However, the Carolinas again reported outsized hiring resulting from the region's outsized growth. The same was true with firms in health care, energy and defense, as well as those affected by data center-related activity.

Few signs of imminent AI-related labor cuts. Firms were more likely to expect AI to grow output and margins than to spark layoffs. Several firms cited tangible productivity gains from AI adoption, and more were expected. Instead of layoffs, those gains largely seemed to result in reduced hiring. With AI freeing up capacity, several firms planned to or already reallocated their existing workforce to produce more with the same staff. For most firms, these efforts improved margins. One services firm reported using those gains to lower prices and stay competitive. Several firms noted considerable resistance among staff toward AI adoption presumably out of fear for their job security. A staffing firm flagged that a few firms had started to rehire for positions they had initially eliminated due to too lofty AI aspirations.

Pricing: Were Firms Able to Pass Along Elevated Costs?

Limited pricing power constrained pass-through and pressured margins as cost pressures intensified. Many firms noted they were passing on some costs, with fuel surcharges being the most common example. Like in prior months, business-to-consumer firms (B2C) felt less able to raise prices than business-to-business (B2B) firms. There were some exceptions, however, such as a few B2B firms struggling to continue passing through costs, and some B2C firms taking advantage of stronger-than-expected consumer demand to raise prices.

Due to limited pricing power, even firms that managed to pass on some of the elevated costs to customers had to absorb a portion in their margins or find cost-cutting measures. Examples included a delay in wage increases or a pause on projects and equipment purchases. Many with compressed margins expressed they "just hope it's temporary." Competitive dynamics for pricing also came up often.

Cost and price pressures weren't one and done. Similarly to their 2025 comments about tariffs, firms noted that cost pressures don't all materialize immediately. They expected additional cost pressures to occur as contracts, hedges, and inventories run out over the summer. Further, firms pointed to long transit times for consumer goods imported from abroad, highlighting that prices won't reflect full conflict-related disruption until later this year and into 2027.

Looking Forward: Where Are We Headed?

This cycle, we'll continue to monitor many of the same questions: Do consumers continue to find ways to manage higher prices, or will signs of increased strain multiply? Do cost pressures intensify or ease for businesses, and to what extent are they able to pass along higher costs? How do firms deal with margin pressure? Do they pull back on labor?

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.