The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Overview. District economic conditions improved in most sectors since our last report. Manufacturing activity expanded further in January and early February. Retail sales picked up and shopper traffic moved higher. Revenue growth at services- providing firms slowed, while most tourism businesses continued to post moderate gains. Likewise, bankers reported that lending to both residential and commercial customers increased slightly, although the level of demand remained low. Both residential and commercial real estate contacts cited moderate gains in sales and leasing activity during the last six weeks, even though the overall level of demand was weak. District employment improved somewhat, but both manufacturers and professional services firms continued to report problems finding qualified workers. Both manufacturing and services prices received were up only moderately from our last report, while prices paid moved significantly higher.
Manufacturing. District manufacturing activity advanced further in recent weeks. An automotive parts manufacturer reported that sales remained strong, and the recent strength of sales had driven an increase in his capital spending for equipment. A textile producer saw a general pick up across all sections of his business. He added that his supply of raw materials was tight, due to the low levels of his suppliers’ inventories at the end of the year. Similarly, an electrical components manufacturer described business as still reeling from the spillover effects of the flooding in Thailand; he stated that his backlog of orders was large because his suppliers were unable to fill his orders. A furniture manufacturer cited improvement in the past few months, noting that his business usually picks up with rising consumer confidence. Moreover, a fabricated metal producer indicated that business was strong, with January orders and shipments increasing by double-digit rates over December levels. According to our recent survey, raw materials prices grew moderately from a month ago, while finished goods prices grew at a slightly quicker rate than a month earlier.
Retail. Retail sales rose and shopper traffic increased in recent weeks. Big-ticket sales were generally flat, however, according to most contacts. Auto dealers in South Carolina and Maryland experienced a slowdown in sales since our last report. In contrast, a car dealer near Washington, D.C. said that his establishment was hiring more sales associates to handle the increase in customer traffic and sales. Store managers at big box department stores across the District indicated that sales were steady or slightly stronger, and remarked that television sales blipped up just before the Super Bowl. However, the warm winter resulted in mark-downs on a large quantity of winter apparel. A central North Carolina store manager reported that spring and summer apparel had arrived, but the lingering stock of winter clothing had left little room on the floor for new merchandise. According to our recent survey, home and garden retailers reported a pick-up in sales, as did department store wholesalers. Retail prices continued to rise at a moderate pace since our last report.
Services. Revenues grew a bit more slowly overall at services- providing firms over the last month. Contacts at professional, scientific, and technical businesses gave us somewhat mixed reports. However, an executive at a brokerage firm thought that account statements were “looking better.” Recruiters in the Carolinas reported increased demand for permanent employees, particularly “technical talent.” An executive at a nationwide trucking firm stated that freight demand increased over the last month. Finally, a North Carolina hospital contact reported a major increase in capital spending to meet new healthcare reform requirements. Prices at services firms moved up at a restrained pace.
Finance. Lending to both residential and commercial customers increased marginally across the District over the last six weeks. However, the level of demand for loans was often described as weak, and several bankers were still reporting little change since the end of last year. While most mortgage applications continued to be for refinancing, loan officers around the District reported a slight increase for home purchases. Also, the average size of loans increased. One banker in Richmond stated that investors, taking advantage of low prices and interest rates, were a key source of such mortgage lending in his market. An official for a large bank also stated that his bank remained very cautious about any consumer loan application, especially for purchasing a home. On the commercial side, several bankers extended more merger and acquisition loans. A loan officer for a regional bank said that his bank had increased its lending for new equipment as well as for refinancing. A Virginia banker reported a slight uptick in lending for inventory. However, other bankers stated that loan demand in those categories was flat. While most construction loans other than for multi-family buildings remained limited, several bankers reported an increase in loans for owner-occupied facilities and their furnishings (mostly to medical professionals). Credit standards remained tight, but most bankers reported that their lending targets were increasing this year, even though competition for quality loans was intense.
Real Estate. Residential real estate activity showed modest improvement since our last report. Indeed, some contacts suggested that the sector had moved beyond the bottoming-out phase. For example, lower inventory of both new and existing homes was reported in the D.C. and Richmond areas, with some builders beginning to sell and even build again. A source from North Carolina said that a housing development was successful due to a “rent-to-own” plan. He added that new construction activity was also starting to occur in the Research Triangle area. While most Realtors reported that sales were either flat or up slightly, housing prices generally continued to decline. Several agents attributed the drop in sales prices, in part, to short or distressed sales being used as comparables. They noted, however, that many buyers were avoiding short sales and foreclosed homes due to often a six to eight month delay in closings. Most Realtors cited sales in the low-price range as faring better than sales in the high-price range. An exception, however, was an agent in the D.C. area, who said that home sales over $1,250,000 were outperforming all other price ranges. He added that he was starting to receive multiple offers that were well above listing prices, and he expected this trend to continue through the spring selling season.
Commercial real estate activity improved slightly since our last report, especially for office space. A Realtor in the D.C. area reported that he had been very busy since the start of this year, but mostly with inquiries that had yet to turn into closed deals. He added that so far this year government-related activity was down. A Virginia real estate agent noted that while office building purchases remained weak, some clients had increased their leasing in hopes of purchasing at a later time. While office rents have stabilized in most areas of the District, many agents reported that concessions remained widespread. One Realtor said that, in order to retain struggling tenants, he had been making repairs and upgrades that would normally be left to the tenant. Retail leasing activity remained mixed, with one agent reporting that anchor stores at large malls were stable, but small boutiques in the same malls were having difficulty meeting their rent and some were closing. On the industrial side, data processing and distribution centers were a positive source of leasing activity, according to several agents around the District. While industrial demand generally remained weak, several contacts reported some improvement since the start of the year. An architectural firm reported an increase in demand related to site development, suggesting that industrial clients might be planning construction starts later this year.
Labor Markets. Assessments of labor market activity were somewhat more upbeat than in our last report. Several employment agencies stated that demand for temporary workers had increased and those contacts were optimistic about future demand. A Baltimore agent noted that the demand for temp workers had definitely increased, and his company was experiencing a pickup in recruitment demand for skilled and semi-skilled jobs in the manufacturing and distribution sectors. He added that the agency was beginning to see some upward pressure on wages for manufacturing and distribution center skills, as finding qualified workers remained difficult. A representative at a Richmond staffing agency reported that employers were starting to complain that they were not getting enough qualified applicants. He noted that even with growth in postings, matching of openings with qualified people continued to be challenging. According to our latest survey, District manufacturing employment improved over the last month, while wage gains were slightly lower than a month ago. Both retail and non-retail services employment picked up in recent weeks, while the pace of average wages in the service sector overall increased moderately.
Tourism. Tourism remained generally strong, with some contacts reporting further strengthening in recent weeks. A contact on the outer banks of North Carolina reported a good start to the year and strong vacation house rentals, with weekend travel up as a result of good weather. Businesses in that region expect a good tourism season ahead, supported by such scheduled events as music festivals, bike races, and marathons. A hotel general manager in the mountains of North Carolina, where weather was also mild this winter, noted an increase in bookings, and he expected modest growth to continue through the summer season. Elsewhere, several ski resorts have been adversely affected by the mild Mid-Atlantic winter, and a resort in western Virginia will cut jobs to reduce costs, according to an executive.
Agriculture. Unseasonably mild temperatures, coupled with below- normal precipitation held back crop yields in some areas of the District. In North Carolina, tobacco and cotton yields reached only 50% of historical averages as a result of damage caused by severe weather last summer. In South Carolina, dry weather late in the season significantly reduced what was previously expected to be an outstanding cotton crop. Moreover, results of our recent agricultural credit survey indicated that farmland values were slightly below the previous quarter and year-ago levels. In contrast, ample amounts of rain throughout Virginia, combined with above-normal temperatures, resulted in above-average yields and near-record commodity prices for most grain producers. An analyst in the Commonwealth described 2011 as a solidly profitable year for most grain producers due to increased export demand.