Tom Barkin may be the biggest road warrior on the FOMC.
When he's not debating monetary policy at the Mariner S. Eccles building, you can probably find the president and CEO of the Federal Reserve Bank of Richmond traveling around his district, which includes Washington, DC, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. While there, he talks to local businesses, rotary clubs, non-profits, and economic development boards about what they’re seeing on the ground right now.
It’s a somewhat unusual approach for a Fed president and one that might be attributed to the years Barkin spent as an executive at consulting giant McKinsey & Company. Members of the Federal Open Market Committee, the central bank’s main monetary policy body, primarily look at available macroeconomic data and official statistics to guide their decisions when it comes to setting benchmark interest rates.
However, there is also a role for real-time color and anecdotes about the economy that comes from meeting with business executives, workers, or community leaders. Some of this is captured in the Fed’s Beige Book, which gathers commentary from around the country and is published eight times a year. But some of it you only get by actually hitting the road and talking to people.
In mid-April, Barkin made a swing through two rural counties in North Carolina and the Odd Lots podcast got to come along.
We heard him talk to a manufacturer of carports about what they’re seeing with pricing power, commodity costs, consumer demand, competition, and access to bank credit. He spoke to a non-profit leader trying to work out a model for affordable childcare, and why current options are so constrained. He met with two local textile operations, one with manufacturing facilities in Mexico (and soon to be in El Salvador) and another producing advanced fabrics right there in Yadkinville. We heard them talk about everything from labor costs to competition with China, and ensuring their workers have access to affordable housing.
Thanks to the participation of these groups, we were able to record the conversations — allowing for a rare public glimpse of what a member of the FOMC actually hears when going out to meet the community. And we learn what they want to hear from a regional Fed president, and what Tom wants to learn from them. Are goods prices still falling? Are sales still growing? Do businesses still have unfilled vacancies? Are higher interest rates affecting access to capital in ways that may not be visible from national aggregated data?
We also interviewed Tom himself about the conversations, to better understand his process for incorporating what he hears on the ground with the national macro data he looks at, and how he synthesizes the two in order to express a view on how key rates should be set.
You can listen to the episode, and hear the various participants speak, or read the full transcript of it below.
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Tom Barkin [Richmond Fed] (00:10):
Hey, I'm Tom Barkin. Yeah, thanks for making the time.
Alvaro ‘Albert’ Lara [Carport Central]:
Of course, of course.
Tracy Alloway (00:20):
That's Tom Barkin, president and CEO of the Richmond Fed, one of the 12 regional banks of the Federal Reserve.
Joe Weisenthal (00:26):
He's talking to executives at Carport Central, a manufacturing firm that builds and sells carports, garages, barns, and even homes made out of metal tubing.
Tracy (00:36):
In addition to being a voting member of the central bank's monetary policy body, the FOMC, Tom's responsible for actually implementing that policy in his district.
Tom (00:45):
It’s so nice you’ve prepared some stuff for. We're all ears?
Joe (00:47):
Yeah. He's on one of his regular listening tours, traveling by car around the Richmond Fed area, which covers DC and several southeast states, including North Carolina, where we are right now. In Mount Airy, North Carolina to be exact.
Tracy (00:59):
Tom's invited us to come along as he learns about the businesses in his district and what they're seeing when it comes to inflation, the labor market, consumer demand, and the general economic outlook.
Albert (01:10):
You know, whatever you guys need from us. We're here to answer the questions and we kind of tell you about our industry.
Tom (01:15):
We’re interested in demand. We're interested in labor markets, we're interested in supply chains, we're interested in pricing. To understand all that we need to understand the business.
Joe (01:24):
You'll get to hear what a Fed president hears as he embarks on one of these research trips. What are the questions he asks to get a better handle on the direction of the economy, and what kind of questions get asked to him?
Winston-Salem Rotary Club member (01:35):
What is it right now that prevents the Fed from lowering interest rates?
Tom (01:43):
Well, technically nothing at our next meeting, but practically it's that inflation's too high.
Tracy (01:48):
We're also going to hear from local businesses themselves and learn about things like carports, thermal underwear and spinning yarn from plastic bottles.
Joe (01:57):
And we'll hear some of the challenges and opportunities facing some of America's small towns. Things like shrinking populations, housing shortages, and the difficulty of finding childcare. This is Odd Lots on the road.
Tracy (02:38):
Historic downtown, Mount Airy! There's a candy store. Let’s go there.
Tracy (02:44):
In many ways, Mount Airy really is the quintessential American small town sitting in Surry County in the northwest corner of North Carolina, it was the inspiration for Mayberry, the fictional idyllic home of the Andy Griffith Show. It's also the first leg of Barkin’s trip for this week.
Tom (03:01):
We try to go to places that we haven't been. The big cities work themselves, I'm there naturally to give speeches to rotary clubs or chambers of commerce, but the small towns, you have to put them on your calendar. And we picked Mount Airy because we hadn't been here before and we'd heard some interesting stuff about what they're doing in the workforce.
Joe (03:17):
Once the locations are chosen, Barkin and his team generate a list of the region's key employers then start reaching out to set up interviews and maybe a meal or two with some of the local community leaders.
Tom (03:28):
We always want to find whoever the biggest businesses are and try to understand, because they'll have the best input on the labor market. And then I do try to do a round table, where I can, of whatever the core business is in that community. It was aquaculture in the northern neck. It's tourism in a place like Mount Airy. I'm trying to understand the core part of every town's economy and how that's performing.
Joe (03:51):
Tom's not wrong about the importance of tourism in Mount Airy. The Andy Griffith Museum and Mayberry-themed shops on Main Street inspire thousands of tourists to come every year.
Tracy (04:00):
It's a pretty cute town. There's a downtown area with a store that sells moonshine ice cream, which was delicious. There's Mayberry RFD cop cars parked on the street and a gospel music store selling guitars, which you loved, Joe.
Joe (04:15):
I did. But there's also other types of businesses around too. Take for instance, Carport Central. The company makes these outdoor structures that you can use to protect your car from rain or snow or sun, but it also makes bigger things like barndominions or prefabricated houses. It's actually one of several companies in the immediate area that manufactures these structures making the rural county a sort of hub for the industry.
Tracy (04:38):
Albert Lara, the president of Carport Central, explains to Tom why that is.
Albert (04:43):
My brother and I have been in this industry over close to 24, 25 years, so almost since it first started back in ‘99 and ‘97, actually ‘98, ‘99, the beginnings of this industry, but it kind of grew in this area.
So Surry County is pretty much the hometown, or home place, or the birthplace of this type of structure. Now, there's been other structures made out of different, you know, tubing, like round tubes and all that, that's, you know, on the west coast. But the square tubing -- and to go into what we're doing now -- is different. So it started off and you probably drove by, even where you live, you see the little tops and people park their cars or you drive by some kind of dealer that sells outdoor equipment or something. You see a little sign that says a price. Well, that's how it pretty much started.
Joe (05:31):
It's an interesting time to be a Fed president talking to businesses about what they're seeing day to day. Across the economy, inflation is still above the central bank's 2% inflation target, but unemployment is still at its lowest level in years.
Tracy (05:43):
And even though the Fed isn't satisfied with progress on prices, in some respects, the US economy has defied expectations. A lot of people thought things would cool down as the Fed hiked interest rates at the fastest pace in decades. Many thought we'd be in a recession by now,
Joe (05:59):
But that hasn't happened. And yet there's still a lot of uncertainty over things like consumer demand and the ultimate impact of tighter monetary policy.
Tracy (06:07):
And in many ways, the carport business is kind of emblematic of a lot of recent trends in the economy. Sales boomed in the aftermath of the pandemic, when everyone was buying cars or adding stuff to their houses, and then there were supply chain issues. And the business has since seen some tailing off in demand.
Carport Central employee (06:24):
Covid hit, and it was like a boom because everybody pretty much got, you know, an influx…bought
Thomas Williams [Carport Central] (06:29):
They bought an RV.
Carport central employee (06:30):
And they bought. Yeah, they needed this and people were at home a lot. Well, now I need a place to put my stuff and redo my bathroom, I'm going to put all my stuff in this building now, which is great. But again, you know what happened there, supply chain issues. And so a lot of the material was delayed and then they came in and it was a higher price and it was just a crazy time.
Tracy (06:49):
So for Tom, the big questions right now are what Carport Central is seeing in terms of pricing. Because when stuff was booming, carport manufacturers could all raise their prices. But as things normalize, it's becoming a lot more competitive.
Tom (07:03):
So on the carport side, does that mean that your pricing's under pressure?
Lara (07:07):
Yes. So we have to compete with an inferior product, but the consumer, at a certain point, they don't really take that into consideration. They just say, ‘You know what? I just want the lowest price product.’ They don't care. Even if we tell them ‘Well, our product is 30% to 40%, 50% stronger than what you're getting.’
And unfortunately we have to either match the price or in some cases try to undercut it. But the thing is we're paying a whole lot more for our materials and of course our designs and everything. They're way above what most people are getting. Now,
Tom W. (07:45):
To answer your question a little bit is our pricing. Our profits have gone down because of the competitors in the market that are continuously doing things wrong. So they've cheapened the product. So we were making more money pre-Covid, Covid. Now we're the only industry that I know of that inflation, everybody went up the other way. We went down.
Albert (08:10):
Our pricing went down.
Tom (08:12):
On behalf of an inflation-fighting organization, thank you for that.
Albert (08:16):
But our labor is still high.
Tracy (08:19):
Labor cost and the availability of workers is also an interesting thing here too. North Carolina has seen its population boom in the years since the pandemic – in fact, it’s still one of the fastest-growing states in America. But that population growth hasn't been spread evenly.
In Mount Airy, there are now about 10,700 residents, not much more than the 10,400 people that were recorded here more than a decade ago, back in 2010.
Joe (08:46):
That means the area is having to get creative when it comes to the labor market. For instance, there's an apprentice program called Surry-Yadkin Works. It's been placing hundreds of local high school students into internships and apprenticeships for things like welding, manufacturing and teaching, providing future workers for those businesses and giving young residents a reason to stick around.
Tom (09:06):
So many of our small towns have a problem with population growth and workforce growth. And this is an effort to try to get local people meaningfully engaged in the workforce in places where there are lots of good jobs. And I think that's a very interesting thing that other communities might want to replicate.
Tracy (09:23):
And businesses like Carport Central have had to get more creative when it comes to their labor too.
Albert (09:27):
It's not as efficient when you get to a large volume production. You have to have faster equipment, you have to have more automation or more people, one of the two, right? More people, more regular equipment.
But for us, we went with a little bit more automation. We still have to have more people, but automation has helped us get to where we're at streamlined. But what we've noticed is that at the beginning, say last year we were working 45, 50, maybe 60 hours in some cases, Saturdays, half Sundays, one shift.
We wanted to cut back to 40 hours and we didn't want them to work on weekends, but we still have a lot of demand. So we had to get more efficient in our processes. And the guys, you know, they were very, very hesitant at first because obviously they were used to getting a 50-hour paycheck or 60-hour overtime.
But we told them ‘look, let's try this.’ We want you to spend more time with your family. We want you to enjoy, we don't want you to have to stress having them to come in and finish this, or we don't want you to rush through it where it's not the exact quality we want. So now that's changed a lot and I think that's probably why -- back to Tommy's point -- is our turnover rate isn't as much as it probably is for other manufacturers.
Joe (10:46):
So Carport Central has been able to adjust to some post-pandemic pressures.
Tracy (10:50):
But there are still some restraining factors on its business. Take for instance, banks and the availability of credit. Not only have interest rates surged as the Fed fights inflation, but banks have also been pulling back on some loans.
Tracy (11:02):
What's the biggest constraint on your growth right now? Is it getting the materials? Is it availability of contractors? What's stopping you from selling even more?
Albert (11:14):
I guess for us it's going to be more financial institutions understanding our business more. I think the supply chain issue for us, it's okay, as we have access to different supplies, but it's more of having a backing of a financial institution, for us.
Tracy (11:37):
So credit?
Carport Central employee (11:38):
So credit. But our turnaround time in our industry, luckily it is pretty quick, but because of the fabrication time and their time schedule for commercial projects, they are not able to pay us, let's say within maybe 90 days.
And our credit terms are, say, net 30, net 45. So basically we have to have a reserve of cash. You know, it'll come in, but it's just a delayed situation. So the growth that we're seeing, we're actually being restrained because of not having access to the capital that we need to actually move forward.
Tom (12:14):
And what are the banks telling you when you go talk to them and say ‘I got a business and I got a lot of demand and I just need a little more capital?’
Carport Central employee (12:19):
Well, I think right now it's mostly because of the way the economy's going. They're really, they're not as free telling you ‘Hey, come on in, let's help you.’ It's more like ‘Eh, let me see if I can, I don't know if I can,’ that kind of situation, not like it was before.
Tom (12:34):
But it's access rather than rate because you could say ‘Oh, they'll give it to me. It's just costing me too much.’
Tom Williams (12:39):
Yeah, I think it's more access. I think people are more reserved with that.
Joe (12:43):
And as we've seen before, even as the company gets bigger, that creates a new set of challenges.
Carport Central employee (12:48):
But with the other challenges that we're facing, competition, but also the lending part, getting to that, it costs money, we have to have a team of CPAs, you have to have a financial, it's more money, more, you know, income that's dedicated to that instead of dedicated to the equipment and, you know, growth. So that's where, and I don't know, maybe you've seen other banks, other companies like this?
Tom W. (13:14):
And internal processes too on the accounting side, you know, growing so much that we were growing 25%, 35% every year for the past five, six years. But then we got to that point where, okay, QuickBooks can only do so much, right? So we went into an ERP system. You know, going to that ERP system has been a very, very hard struggle over a year now trying to implement,
Tom (13:40)
Yep. Nobody enjoys that transition.
Joe (13:43):
For those of you wondering an ERP system is basically software used to organize a company's finances, supply chain management, and a lot more. The reason this is familiar to Tom is because not only does he spend a lot of his days on the road talking to businesses about stuff exactly like this, but he also spent many years at McKinsey, the consulting giant, before he joined the Richmond Fed.
Tracy (14:03):
That background is one reason he takes such an interest in the nuts and bolts of local companies. But what does he do with the information that he gets from these meetings? At the end of the first day of his trip, we sat down with Tom to talk about what he'd heard.
Tracy (14:17)
You know, the town's commerce department says ‘We have to compete with other areas in order to attract developers. Or you speak to the head of a carport company and they say ‘Well, it's difficult to get financing for what we're building here.’
Tom (14:32):
Well, sometimes what I learned is confirmatory. Sometimes what I learn is new. We had a dinner where we talked to a bunch of people about the labor market and what they told me, which was news, was that they're still short workers in teaching, in healthcare, in state and local government.
And you know that's where most of the have been added over the last year. And one of the big questions, is is that cycle complete or not? They sort of sent the message, it's not yet complete, which is helpful, you know, to know there's still a little bit of juice left in the job market.
We had a conversation with a carport manufacturer and they're feeling significant price pressure and if you care about inflation, that's good to know. And again, maybe confirmatory that on the goods side, there's still price pressure coming.
This housing thing is very interesting in terms of shelter costs. You know, is housing availability getting plentiful enough that you can imagine shelter costs coming down or is it still tight enough that we have a challenge?
And so, you know, I try to bring what I learned in the economy into the room at the FOMC and hopefully am able to build confidence -- when I do 20 of these conversations, not just one -- that I learned something about what's happening to goods inflation and services inflation and shelter inflation, that I know what's happening to the labor market into wages and I have a real-time sense of what's happening to demand.
So that's what I'm learning, and you will have noted that I asked 30 of those questions today, many of them off cycle. As I meet somebody right before a speech or before talk, I'll turn to them and ask how their business is doing and try to see what I can learn.
Joe (16:03):
For Barkin, the anecdotes he learns from local businesses help to supplement all the official data that the Fed gets constantly. Things like non-farm payrolls, weekly jobless claims and much more. So it's interesting to ask him if he ever sees or hears things on the ground before they show up in the official data.
Joe (16:20)
So you mentioned when we talked about the sort of anecdotal learnings, the examples you gave were sort of either confirmatory or maybe inform something at the margins like, okay, maybe there's still more juice on the public sector for [the] labor side. How often does it come up where people will start consistently saying something that, oh, this is really not showing up in the data yet, and it's sort of an early signal of something that later on you say ‘Yep, there it is, playing out in the numbers.’
Tom (16:48):
I'd say every quarter there's something like that. So in the fourth quarter last year, in October, you may remember the numbers were really, really frothy. And I wasn't hearing any of that in the market, and I actually came out and said ‘t's just not consistent with what I'm hearing.’
Joe (17:02):
The inflation numbers?
Tom (17:03):
No, the demand numbers, the consumer spending numbers, the retail sales numbers were very frothy. That's not consistent. I'd say today we just got a retail sales report recently that was quite strong and I'm hearing decent consumer spending. I'm not hearing that strong. And maybe I'll be proven wrong by the time this airs, but that's what I'm hearing.
So I do hear things that are different and then I hear some number of things that are in advance. May of 2020 in Bristol, Tennessee opened, Virginia wasn't open. It was right at the end of the first part of Covid and I talked to a developer who said ‘Oh my God, the malls are packed.’
And that was before any of us knew that the opening of the economy would lead to that kind of spending. You know, that's a good example. I'll also get a reasonable amount of, I'll call it segment specific information. You know, how are higher income consumers thinking versus lower income consumers? Or what's the job market for professionals versus skilled trades? And so the overall number may be the same, but you'll get some insight into what's really driving it
Tracy (18:06):
While Tom is gathering information to supplement his data, the folks he talks to are also learning from him. Something we saw over and over again on our trip to North Carolina is that people are just fascinated by what the Fed actually does and how it works.
And at a time when inflation is still running above target and there's still a lot of doubt about the direction of the economy, there are more questions than ever about what the Fed is doing.
Joe (18:29):
Obviously everyone wants to know where interest rates are heading, but they also want to know what other businesses are saying, what the Fed's hearing, and crucially how the Fed processes all that information.
So these trips are not just a chance for business leaders to tell a fed president what they think. They're also an opportunity to find out what's on his mind and get their own questions answered More on that in our next segment.
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Winston-Salem Rotary Club member (19:09):
I think we'd love it sooner if we could, but at the end of the day, that's…
Tracy (19:14):
Welcome to the Winston-Salem Rotary Club's weekly luncheon. This week's guest speaker is of course, Tom Barkin.
Joe (19:21):
Tracy, I'm glad we finally figured out what a Rotary Club is.
Tracy (19:24):
Yeah, I had this sort of vague idea in my mind, but I had to look it up too. It is a society of, I would say civic-minded people who meet regularly to network and take on some community projects.
Winston-Salem Rotary Club member (19:36):
We’re all about the community? I felt like every week I come, I learn something about my city that I didn't know before.
Joe (19:45):
The Winston-Salem Rotary Club has been going on for more than a hundred years all the way back to when Winston-Salem was basically cigarette central. Today driving around Winston-Salem, I'm pretty sure we saw more vineyards and breweries than we do did to tobacco fields.
Winston-Salem Rotary Club member (19:58
):
So please give Tom Barkin a warm welcome.
Tracy (20:02):
As part of his trips around the Richmond Fed District, Barkin often speaks to local business groups and societies giving his regular stump speech about the state of the economy.
Tom (20:11):
Thanks, Chris. I appreciate that advertisement. So it's great to be back in Winston. I'm a proud Deacon parent…
Tracy (20:18):
But the reason he enjoys doing it is for the Q&A portion afterwards. Taking questions from the audience members helps reveal what's really on people's minds.
Tom (20:27):
I want to know, because I do think this two-way interchange on the economy is really quite valuable…
Joe (20:32):
Even if you're a regular watcher of the Fed, you can learn a lot from this discussion
Winston-Salem Rotary Club member (20:37):
To the extent you can, can you give us any flavor of what you all discussed in your interest rate meetings? And secondly, do you have favorite economic benchmarks you find very useful?
Tom (20:49):
You know, what I'm mostly interested in is real-time information. You're trying to figure out what's actually happening in the marketplace. So I get credit card spending every week, year-over-year, and during Covid, I got pretty calibrated on what that means in terms of retail sales.
But that's something I look at closely to try to get a sense of demand. Consumer spending’s 70% of the economy. On the labor market, the jobs report that comes out every month is clearly the best, most secure thing. But I take some comfort from the weekly jobless claims, because it's at least a real time measure of whether layoffs are accelerating, which is what you'd see if the economy turned south.
And I think you kind of get the point. I'm trying to figure out is there any risk of the economy turning? That's really what I focus on.
In terms of the meeting, maybe I'll give you a 10-day look at it rather than just the meeting itself because the weekend before, 10 days before the meeting, the weekend 10 days before the meeting, we'll get, the staff does a 200-page vertical text, greatest analysis of the economy you've ever seen. And it'll include domestic and international and financial markets and lending markets and different scenarios for where the economy might go and different monetary policy operations. And so it's a brilliantly done piece of work.
Tracy (22:06):
Joe, wouldn't it be cool to see that 200-page Fed staff analysis of the economy?
Joe (22:11):
Definitely, but I'll settle for the speeches and meetings
Tom (22:15):
At the same time, Jay Powell sends around his first draft of what the statement might be. And so we work all weekend and into the week, debating how we want to talk about the economy and whether we like that statement.
We’ll offer Jay -- I'm giving you this background so you understand me -- we'll offer Jay our perspective on this statements. He always likes mine best. That's not actually true. I'm making the point, the statement that we issue the Wednesday of the meeting has largely, not always, but largely, been pretty well-vetted by the time you get to the meeting.
So we don't go to the meeting and try to line edit a statement. For the most part, every time that the chair has a bad press conference, that's because we've line edited the statement in the meeting and we send them out there two hours after the meeting to go defend it, which is, I think in my judgment, a little bit of malpractice.
But we do it sometimes in the meeting itself.
There's often a special topic and so the staff will present some papers on the special topic and we'll have a debate about it. Then we all go around and talk about economic conditions. So I'll say ‘I've been in the district for the last seven weeks and here's what I think I've learned, and here's what I take solace from in the recent data and here's what I think are some interesting conclusions you might not have otherwise thought about.’
Then we all talk about the statement, pretty productive meeting. It's a reasonably formal meeting. It's not really flippant. There's not tons of humor in there. You know, it's a pretty serious meeting, but it's also, every word is transcripted. So if you're having trouble sleeping, you can go get them from five years ago,
Joe (24:01):
About 30 miles west of Winston-Salem, and half an hour's drive south from Mount Airy, is Yadkinville, in Yadkin County. Population 37,700 people -- and, for the better part the of the past decade, that population has been shrinking.
Tracy (24:13):
It's day two of Tom's North Carolina tour and we're starting off at the offices of textile manufacturer Indera Mills
John Willingham [Indera Mills] (24:20):
It’s worth a real good look…
Tom (24:22):
Well, one of the ways we pick where we visit is when you hear there's something interesting going on, and we talked to the Surry Yadkin Works yesterday, up in Surry County, and then we thought that would be interesting today. And then we try to find the big employers in a market.
John (24:37):
Well, we're not a big employer, but we're pretty unique. We've got a good story to tell
Joe (24:42):
That’s John Willingham, the fourth generation owner of Indera Mills in Yadkinville. His company can trace its history back over a hundred years -- all the way back to Colonel Francis Henry Fries, who was the first president of Wachovia Loan and Trust, which eventually grew to be one of the biggest banks in the US before being bought by Wells Fargo in 2008. In addition to banking, the Colonel started a bunch of textile businesses in the early 1900s.
Tracy (25:06):
That's right, because North Carolina used to be a global player in textiles. There were mills in almost every single one of the state's, counties as recently as the 1990s. And just 30 years ago, those mills were employing some 280,000 workers. But that started to change as global competition heated up and companies moved production outside of the US. Today there's just an estimated 39,000 textile workers in the state.
John (25:32):
We migrated up here in 1998. We were in hundred year-old facilities in Winston-Salem, and this was a good community. We already had satellite plants up here, so we came to Yadkinville and then we got on board with NAFTA and moved our manufacturing, a lot of our labor work to Mexico.
Tom (25:52):
And is that how you managed to survive the whole trauma that happened around here?
John (25:56):
That's exactly right. So what we kept here in Yadkinville is back office functions, design work and distribution. So all of our labor assembly work is in Mexico. We have plants in Monterey, Mexico,
Tracy (26:13):
So Yadkinville was a big mill town once upon a time. But lots of places in America, this particular type of manufacturing just got hollowed out.
Joe (26:22):
Indira survived in part by outsourcing its production. They also started specializing in thermal underwear. And Tracy, I just have to say I love thermals. Anyway, today you can buy Indira thermals in places like Tractor Supply and Dick's Sporting Goods.
John (26:36):
Yeah, we realized that to survive, we needed a niche. We needed something that we could control, and that was a very small market and not a very interesting one for a lot of larger players like Haynes or Gildan or Fruit of the Loom.
So we picked thermal underwear and we became sort of the go-to people in thermal underwear. It's a highly seasonal business. It requires a lot of working capital because we build inventory all year and that keeps people out of it.
Tom (27:06):
And who do you sell into? Do you brand yourself, do you sell into…
John (27:10):
We do mostly our brands, but we also do private label. We like to tell people that we do everybody but Walmart
Tracy (27:20):
Now just like with the carport business, pricing is obviously an issue in the apparel industry too. If you look at apparel in the Consumer Price Index, you can see clothing inflation basically peaked at more than 6% year-on-year, back in 2022. But in more recent months, inflation in apparel has been kind of moderating. It came in at 0.4% in March.
And that’s kind of been the story of inflation across the US recently. Housing costs and services keep going up, but some goods – like apparel – aren’t seeing quite the same kind of price increases anymore.
Joe (27:54):
Indera’s experience also says something about post-pandemic demand. It's basically ridden a rollercoaster here. When Covid struck, it started making face masks. But demand for masks went away as the pandemic petered out, and people aren't buying thermals like they once were either.
John (28:08):
We were the very first people to make masks. I mean, we were like the day after the shutdown. And we couldn't get off the telephone. It was everybody from American Airlines to Cintas Uniforms. They all wanted masks, and so we just did everything we could do.
By June, it was apparent that wasn't going to last. When the economy started to come back, it was so strange because demand was just out the roof. There was a lot of money in the consumer's hands and they were buying anything and everything.
They were buying online like crazy. And so there was a surge of business that occurred and we were all chasing it as hard as we possibly could. We were just, you know, we were blind to the fact that this was an artificial situation and it wasn't going to last. We were riding the wave. And then it caught up with itself and there was literally a crash. Obviously inflation had gone crazy.
Tom (29:19):
So now we're in late ‘21, early ’22?
John (29:20):
Yes, exactly. And demand just fell off. Our largest customer at that time, Amazon, just shut the books. They were so overstocked because they had been chasing it, just like all of us, everybody…
Tracy (29:36):
Joe, Indera Mills is also where we learned there's basically a Jones Act for textiles. It's called the Berry Amendment. Here's Tom and John talking about that as well as the company's decision to move their textile production out of the US
Tom (29:49):
I know the answer to this question, but I'm going to ask because I get asked it a lot, which is, did you consider moving it back to the States?
John (29:57):
No.
Tom (29:58):
And just give us your logic.
John (29:59):
The skill level is just not here anymore. We closed out sewing here in 1994, when NAFTA, I believe it was 9’4 when NAFTA came in, we had 300 people here in Yadkinville sewing, and they were gone instantly. They found other jobs.
To bring that labor force back and to train it and to pay not just the base, but all the fringes and all the ancillary costs that go with it, we would not be competitive. I hate to say it.
Now, you're familiar with the Berry Act, which is products that have to be made in the US because of government requirements, whether it's military, all that sort of thing. There are manufacturers of our type of product and small scale here because of the Berry Act.
Tom (30:57):
They make flags or they make uniforms.
John (30:59):
Exactly. Lots of military. We chose not to get into that, but we would not be able to bring our company, the labor part of our company, back to the States. It's unfortunate. I mean, it broke our hearts when we had to move, but we either moved or Yeah, we had moved or…
Tom (31:19):
You saw what happened to everybody who didn’t.
Joe (31:20):
But even after outsourcing production in Mexico, a company like Indera isn't sitting still and they're currently shifting manufacturing again.
John (31:28):
We’re leaving Mexico.
Tom (31:29):
It's to go where?
John (31:30):
El Salvador.
Tracy (31:32):
Oh, that's interesting. A lot of companies are just now moving into Mexico.
John (31:37):
Well, China is. Mexico, we're in Mexico 25 years. And Monterey, Mexico, I don't know if you've ever been there. It's quite a city. You could be dropped in there and you would think you were in Atlanta or somewhere, but we've seen it grow up in 25 years from carts and buggy, horse and buggy to modern highways and everything.
Inflation is pretty serious there. Of course, everything is unionized there. So you're dealing with an element that we don't have to focus on. Now we have Maquiladoras, so we just contract for labor. We don't own the labor, we don't pay directly, but inflation is pretty tough there. And they've essentially priced us out
Joe (32:21):
So Indera has been able to survive in the mill business in part by adapting to these new challenges. But there are still some complications that come from being based in this small town.
John (32:32):
The housing shortage here is dramatic, and it hurts. It hurts the manufacturers here. It hurts the economy. Small town America is a special place to live, and I consider Yadkinville small town. I mean the values are so great, the work ethic, just knowing everybody in town, first name basis, fewer fears of certain things.
So it's a cool place to live, [a] small town, but you've got to be successful as a small town. You need good progressive government and you need a base of businesses -- a few large businesses, a lot of small-, medium-sized businesses. You need culture. You need the elements that make life enjoyable.
Tracy (33:15):
Yadkinville isn’t alone here, we heard similar things in Mount Airy too. Smaller towns may have cheaper land for construction, but that doesn't mean developers are flocking to them. Here's Tom talking to us about exactly this.
Tom (33:28):
You know, every small town is competing for developers, and there's a limited number of developers -- I gave a speech on this in November -- and developers care a lot about availability of cheap land.
Developers care a lot about permitting and infrastructure in the land, and developers have the ability to choose. And so what they told us here is, if you go a little bit further south where it's closer to an interstate, the developers are prioritizing there.
Now, they had a bit of a roadshow for developers and they think they're making some progress. So that says something about what a community can do in terms of proactively seeking developers. And I think that's actually a pretty important thing if you want housing built in your community.
Joe (34:06):
I find this actually to be kind of fascinating dynamic, right? Because in my mind you would think of like the developers are all competing against each other to find the cheapest land available or whatever it is. But this idea that from maybe like a community standpoint, it's the other way around arguably, and that it works in such [a way] that they need to basically pitch the developers on coming here.
Tom (34:31):
So after the Great Recession, what happened is a lot of developers went under and left the business. A lot of banks stopped financing development. We underbuilt housing for a decade, so we're light developers.
In addition, what's happened during the post-pandemic era is there's been so much construction going on, not just houses, but also data centers and warehouses and state and local government, you know, educational, that we're short construction people too.
And so, if you took the entire economy, you'd say we're actually really short construction capacity, and that's what leads to it. It's an adjustment issue. It doesn't mean it's a permanent problem, but it is right now an adjustment issue. And if you're short housing your community, you really need that housing to get launched today.
Tracy (35:17):
So towns like Yadkinville and Mount Airy are doing what they can here by proactively courting developers and experimenting with new models for childcare, to course correct for that ongoing shortage.
Sandi Scannelli [Shallow Ford Foundation] (35:29):
There just isn't enough childcare. When we did the study in 2021, Yadkin County was the third worst in the state for the number of children, according to a Think Babies report, for the number of infants and toddlers per slot. We're about 19 to one slot.
Tracy (35:52)
Why is that?
Sandi (35:54)
There has been a huge reduction in the number of childcare providers. It's like 82% have reduced within the last 12 years. So it's been shrinking, partially because it is difficult to maintain a license to get the star rating. Star rating is like a quality rating. And here, for private providers, we don't, other than one family home in the western part of the county, there are no four- or five-star rated childcare providers.
Joe (36:32):
That's Sandi Scanelli of the Shallow Ford Foundation. She's spearheading a new type of childcare model that would see providers pool and share resources like buildings, playgrounds, and operations to help lower their costs. Tom met with her as part of his tour of the county.
Joe (36:46):
So typically speaking a childcare provider would have to do the legwork of finding the location and furnishing it and building it out itself.
Sandi (36:55):
Yes, to meet licensing requirements.
Joe (36:56):
Right. And so the main thing that this solves, it sounds like, is just like, they just have to rent this, they can focus on what they do, taking care of children without having to worry about all these other ancillary things to get the physical...
Sandi (37:09):
Because licensing is both for the individual as well as for the facility. And when we did our study, what we found is that, I'll give you an example. One of the playgrounds needed new mulch. It was going to cost $8,000 to replace the mulch.
That's a key licensing factor is you have to have six inches of fluffy mulch. And so every time it rained, they were running outside with pitchforks to fluff up the mulch. Well, those kinds of stresses are a distraction, honestly, from managing that facility. So to have the facility taken care of and maintaining that license really allows more focus on the childcare. But
Matt Martin [Richmond Fed] (37:58):
SmartStart is only doing the facility. It's not a other shared cost model like HR or that sort of thing.
Sandi (38:04):
Actually, no. They will also offer back office support to each of those businesses if they are interested in it.
Joe (38:12):
So the hope is that if some of the backend can be centralized, then the actual childcare providers can focus on what they do best, providing childcare and reversing the decline in total capacity.
Tracy (38:24):
And of course, this isn't just a small town problem, a shortage of childcare providers and high housing costs, all of which contribute to inflation, is pretty much the story across America's economy.
At our next stop, we talk to one of the largest employers in the county, and see how all the things we've talked about, labor, housing, prices, have impacted them as well.
---
Eddie Ingle [Unifi] (39:06):
Hi, welcome. Welcome to Unifi.
Tracy (39:10)
Hi, Tracy Alloway from Bloomberg.
Joe (39:12)
I'm Joe Weisenthal. Great to meet you.
Eddie (39:14)
Eddie. Eddie Engel. I'm the CEO.
Tracy (39:19):
Just a few minutes away from Indera Mills is the Yadkinville factory for Unifi, a publicly-listed manufacturer of polyester, nylon, and spandex yarns. It's headquartered in Greensboro, but it has a pretty big facility here in Yadkinville.
Joe (39:34):
It is a big facility. There is a huge recycling center where Unifi turns plastic bottles into a recycled fiber it calls REPREVE. There are big trucks parked outside that say “bottles = cool stuff.” And there's cool stuff inside too, including a showroom showing off some of Unifi’s material, REPREVE.
Dashiell Bennett (39:51):
And where it comes from?
Smith ‘Smitty’ Williams [Unifi] (39:52):
Absolutely. REPREVE is a product that we have now that we take recycled plastic bottles and it’s chopped up almost like plastic corn flakes at our facility. It’s cleaned. We separate the green and the brown plastic from the clear and the blue. We use the clear and the blue plastic in our yarn
Tracy (40:20):
That’s Smith Williams, Unifi’s HR manager, but everyone calls him Smitty.
Smitty (40:24):
But the clear and the blue plastic is shipped here to our recycle center. Where it goes through another process, becomes PET resin, this PET resin. Then we take it and it is in like plastic BBs and it is melted and extruded. It goes through large shower heads, and as it falls five floors, it becomes a solid again.
Joe (40:52):
That plastic yarn is then sold to companies like Nike, Patagonia, Asics, and others, who weave it into their products.
Eddie (40:59):
In this country, only about 28% of the bottles are collected. And when we get a bale of bottles, we get around 56% yield because the collection system here is not,
Tracy (41:09):
And that's un Unifi’s CEO Eddie Ingle. Bigger companies like Unifi haven't been immune to post pandemic challenges either. Eddie describes to Tom how the price of plastic shot up in 2021 and 2022, including the cost of the plastic bottles that they use to make into fabric.
Eddie: (41:26):
So that price of that bale bottle goes up and down significantly. It’s been as low as 13 cents in the last six months. It's been as high as 18 cents. But it has been as high as 50 cents two years ago.
So with a 56-minute yield, it can get very, very expensive very quickly. And that's an average number I'm giving you. But it's the fact that we have to take the bottles and we have to take the caps off, take the labels off, make this flake, and then we have to take this flake and make it into chip.
And the yield losses are throughout that whole supply chain. But what's cool is, I say this all the time, but you've never met a sad recycler. So what we're doing here attracts young people who want to be sustainable, want to be purpose driven, and while, yes, this raw material is more expensive and the yields are higher, we are giving the brand what they need.
Joe (42:11):
So Unifi is a lot bigger than many of the other local businesses around it. In fact, it's the biggest private sector employer in Yadkin County, and it's had the sort of secular tailwind of demand for more sustainable fabrics behind it. But it has encountered some similar issues. Supply chain disruptions are still kind of reverberating and clouding the picture of demand.
Eddie (42:30):
So I'd say from a demand perspective, there was a lot of over purchasing and stocks of all these brands, that I quoted, apparel brands, went way up because they basically had this supply chain issue. What used to take 30 days from China was taking three months because the boats were sitting out there, but everybody started ordering then not just from China, from Vietnam, from India.
So they had not just long supply chains, they over-ordered to compensate. And then suddenly 18 months ago, 19, 20 months ago, things started freeing up. So all the brands globally just pulled back on as many purchases as they could. And that really impacted us.
We're seeing consumer demand for our products were down about 7% or 8%, maybe 6%. So with the destocking, and not only did destocking happen, but they said ‘Oh, I don't want to spend any of my cash on inventory.’ So they're actually tightening up the supply chain. They're going further, taking more risk than they normally would.
But I will say starting really beginning of this year, most of the inventory seem to be cleared out. So we are seeing business come back slowly. Consumers are still constrained a little bit as far as what we're reading, you know this better than I do. But when Covid happened, everybody jumped to a casual and now they're coming back to wearing a bit more formal ‘Oh, I've got to go to the office. I'm not going to the office. I've got to go to the office.’
Tom (44:02):
If I’d thought about it, I'd have worn a fleece today, sorry.
Tracy (44:05):
And of course hovering over this entire conversation, there is still the question of price.
Tom (44:11):
But in my day job, I'm worried about inflation. I think what I take from what you just said is, you know, over the last couple years, we have not been your problem. Our prices have been headed down, not up.
Eddie (44:24):
I think, it’s one person's opinion to somebody who's very knowledge about this, I think labor always goes up no matter what. But if you think about energy here, energy in North Carolina was very, very stable for a long time. But as energy companies like Duke have invested in renewables, they've been able to pass that cost on as they should or shouldn't, I don't know. But they passed that cost on.
So our energy costs have gone up, not just because crew has gone up, but because of the investment in renewables. So we are a very, very energy intensive company. We use a lot of energy here. We're involved in trying to negotiate that...
Tom (45:03)
So that took your cost up. Labor's taking your cost up. Packaging has taken your cost up.
Eddie (45:07):
Yes. But when 2020 and ’21, ‘22 happened, we had cost escalations because of bale bottle prices going out of the roof and we had record, it was, petrochemical prices went up to a record. If you remember, crude was at $122, $123, maybe $130 spike for a day.
So all of that you had to pass on, otherwise you wouldn't be here. But as it crashed, and because demand slowed down, there was pressure to drop pricing. So I think we're in this, today, this weird spot where everybody knows prices have to go up, and it's just a matter of slowly doing that in a scientific way. And again, where's the value we bring? How do we capture that? How do we price that? It is very challenging, I have to say, from a pricing point of view.
Tracy (45:55):
This is another theme that comes up regularly in Tom's meetings. Big and small companies seem to have experienced a lot of the economy of recent years in very different ways. We asked Tom about this.
Tracy (46:08)
Do you notice a big difference between what larger companies are saying versus smaller companies?
Tom (46:12):
I do. Smaller companies are still struggling to fill workforce jobs. They're still struggling to fill jobs. And that's in part because there was more capacity to raise wages in the larger companies than there were in the smaller companies.
And we were with one earlier today, but when you go to a smaller company, you do hear that kind of constraint being much bigger. During the supply chain shortage era, you absolutely heard that the big companies had a lot more benefit than the smaller companies. And I think when it came to the margin recapture cycle, the big companies have led the way on that. And a lot of small companies are still saying that they're working to recapture margins.
Joe (46:54):
Being able to compete on wages isn't the only edge that larger companies have in the current environment. Many of them have also been able to refinance their debt. Contrast that with the smaller company, Carport Central, which told Tom that bank lending is becoming a constraint on its business.
Tracy (47:10):
That might be one reason, according to Tom, that economic growth has so far defied the gravity of higher interest rates. They just haven't flowed through to some parts of the economy just yet.
Tom (47:20):
Well, so the data that I keep coming back to is interest payments as a percent of either personal disposable income or corporate revenue. And those numbers have only now finally gotten back to 2019 levels. And that's because a lot of individuals paid down their credit cards and refinanced their mortgages, and a lot of companies paid down their debt and refinanced their debt.
And so the in aggregate impact of having the Fed funds rate at five and a third versus where it was basically at zero hasn't really flown through the aggregate economy. Now it's certainly flown through to individual parts of the economy.
And the most surprising things to me, obviously, the residential market, where you've got the 3% mortgage holders who don't want to trade into a 7% mortgage and are unwilling to sell their house. But behind that is that 92% of mortgages are fixed rate, okay? So that's different than what the economy was 15 years ago.
In commercial real estate, multifamily, you hear about a set of people who really can't develop anymore, want to turn in the keys, whatever version of it. And another set of people who are owners who are feeling actually just fine
Joe (48:38):
And Unifi’s experience underscores that big refinancing trend. They refinanced their debt in 2022 and has since been investing in new equipment.
Eddie (48:46):
From a balance sheet point of view, I feel pretty good where we are, but it is impacting us because we knew we were going to take on debt with this new investment. And the investment’s based on equipment that was really new and really differentiated. We'd had a spike in CapEx for like three years, and it was on new equipment that was very, very different from what we could have bought a few years earlier. And we've been developing this.
Tom (49:25):
Well, you guys are great to make the time. We really appreciate it.
Tracy (49:32):
Unifi’s factory was the last stop for us, but not for Tom. As we made our way to the airport, he was already back in the car and on his way to Greensboro for the next leg of his listening tour.
Barkin spends about two to three weeks of every month on trips just like this one. Which means that most days if he's not getting ready for the next FOMC meeting in DC, he's in the car or at another luncheon or taking one last look at another factory floor
Joe (50:14):
So after two days on the road with a Fed bank president, what did we learn? Well, on the one hand, there are some businesses that seem to be doing fine in this environment. Meanwhile, others are struggling with the impact of higher rates and moderating demand.
All of these varied individual experiences are one reason why it seems particularly challenging right now to figure out what's going on with the larger economy.
Joe (50:35)
One of the questions that I think people are scratching their head [at] is, how did the Fed raise rate so much and yet the economy hasn't slowed down as fast as people expected?
Tom (50:43):
Well, [what] I've done intentionally over the last three months, probably 15 different sessions with commercial real estate groups because they're definitely feeling the impact of rates.
And I want to hear from those segments when you talk to banks, which I do a good bit. You also, I hear the same thing. I was very interested because in theory, higher rates should hit the whole economy relatively quickly. It starts with interest-sensitive sectors like real estate and banking. But historically, manufacturing's followed pretty closely, and I haven't heard that much on the manufacturing side.
So it was very interesting to hear these guys talk about how credit availability was constraining their ability to grow. Now, they've had some margin challenges, which they talked about that could be relevant. And I do think the banks I talk to will talk quite openly about tightening credit, and part of that is just being prudent, you know, in a world of uncertainty.
You hear about it, but then you get to see it, right? So now we have in the economy, it's not just what people are saying might happen, there's some evidence that actually is happening.
Tracy (51:47):
Complicating the whole picture is also the overarching weirdness of the post-pandemic business cycle and the long-term impact that the pandemic experience may have had on businesses. This is something Tom talks about a lot.
Tracy (52:00)
I'm curious if there are any lessons that businesses you speak to seem to have internalized from the past few years? The post-pandemic experience. So we used to talk a lot about the idea of labor hoarding. Everyone was caught short during Covid, so they hired a lot, and they're terrified of having to go through, you know, the same scarcity of labor again. Or the experience of raising prices and testing that elasticity of demand. Are those things that people seem to have actually internalized in your mind?
Tom (52:32):
Yeah, so maybe three things that come to mind. Supply chain resilience. If you had everything in China before, you have to ask yourself the question, how smart that is? And so I see everywhere people diversifying their supply chain, more nearshoring than onshoring, but still, in certainly Thailand and Vietnam and Indonesia playing a role too. That's very clear.
Second is, I think a new respect for the scarcity of labor. We lived in a world where labor was long for a long time. Now it's short. You talked about labor hoarding, but I think it's even more than that. It's about investment and benefits and compensation on a continual basis. By the way, on the other side of that, there's investment in automation that's going on as well, but new respect for the scarcity of labor.
And then I do think, on the pricing side, you know I've been talking about this for a while, but there's a bunch of businesses that before Covid knew they had no chance to increase prices. And then Covid happened, supply chain shrunk, labor costs increase. They had no choice. They went from having no chance to having no choice.
And when they raised prices, there were no consequences, right? And so we'd like to be on the other side of that where they really thought there wasn't any chance to raise prices again, but I'm not sure they're done. And if they're not done, part of it is they're trying to recapture margins. Part of it is they're just a little more courageous.
I talked to a furniture manufacturer a couple days ago who just said ‘Yeah, I used to just give in, but now I'm just a little bolder. I've had the experience of raising prices. I'm a little bolder,’ and I think it just takes a while to get from no consequences all the way back to no chance again.
Tracy (54:08):
And that's ultimately Tom's message in this part of North Carolina and beyond. Economic scars can linger for a long time and play out in unexpected ways. There's still an undersupply of housing in places like Yadkinville and Mount Airy, in part because of the 2008 financial crisis -- not just 2020, and the higher interest rates after that.
Meanwhile, the hollowing out of manufacturing in this area and other parts of the US has been going on for decades. Now, companies might be more aware of supply chain disruptions and labor shortages, and they may be more willing to raise their prices to offset them too, which could add to inflation.
Joe (54:46):
All of that creates difficulties for the Fed, which is still trying to balance inflation and unemployment in both big and small towns across America. It has its data and it can attempt to assume some relationship between things like prices, labor market tightness and so forth. But it's hard to know what that lingering psychological effect of the past few years might be, let alone what aspects of the economy still have yet to be normalized.
And if you think about somewhere like the Richmond Fed district, which has both booming cities and deep rural areas, trying to gauge the disparate effects that a given policy change might have gets even trickier.
Joe (55:34):
So Tracy, after seeing all that, I'm not sure how good we would be at the rate setting part of the job of being a Fed president. That seems pretty tough, but I actually think we'd be pretty good at the asking questions of businesses part.
Tracy (55:47):
Yeah, I would not want to be voting on policy moves, but I did like how Odd Lots-y, let's say. A lot of Tom's questions actually seem to be, I feel like we could do that. Shall we leave it there?
Joe (55:59):
Let’s leave it there.
You can follow the Richmond Fed at
@RichmondFed
.