U.S. Federal Reserve Beige Book: Richmond District (Text)
The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Overview. Fifth District economic activity strengthened at a tempered pace since our last report. Manufacturing activity improved, retail sales increased moderately, and customer demand rose modestly at non-retail services firms. Reports on banking conditions were mixed, and mortgage refinancing bolstered consumer lending. Real estate markets also strengthened, with both residential and commercial contacts reporting an uptick in activity. In contrast, labor market activity slowed since our last report. Also, tourism contacts noted a seasonal decline in reservations. Agricultural conditions were favorable before Hurricane Sandy arrived, although some farmers in the District were affected by the storm. Manufacturers’ input prices and finished goods prices rose at a slower rate, while wages rose more quickly. The pace of service providers’ price increases edged up and non-retail wage growth slowed. Price increases slowed at retailers, while wages rose at a faster pace. Several businesses lost power during Hurricane Sandy, but most returned quickly to normal operations. In addition, we received reports of supplier issues and less customer traffic.
Manufacturing. District manufacturing activity continued to improve modestly. A manufacturer of dental products reported an increase in orders and commented that his company would finish the year slightly ahead of 2011. A manufacturer of organizational products said that he expected shipments to remain high; he remarked that his company was picking up market share through consolidation in the industry. A producer of plastic components noted a pickup in activity after several months of reduced orders. In addition, an aerospace manufacturer reported that the company is expanding and is completing a new manufacturing facility. According to our latest survey, both raw materials and finished goods prices rose at a slower pace since our last report.
Retail. Retail contacts reported a moderate acceleration in sales during late October and early November. Hardware and home and garden stores noted higher demand for storm-related items ahead of Hurricane Sandy. Quipped one executive, “Bad weather is good for business.” A store manager at a department store reported that his sales were stable, although he is competing with his suppliers for online sales. Car and light truck dealers gave mixed reports. Dealers in Maryland and West Virginia saw a drop in sales, however a West Virginia dealer recently completed expansion at his location to accommodate additional inventory for ongoing strong sales, and a North Carolina dealer commented that year-over-year sales were mostly strong across the board. The pace of retail price increases slowed since our last report.
Services. Executives at services firms generally reported a modest rise in customer demand since our last report, especially at professional, scientific, and technical firms. Additionally, several architectural and engineering firms indicated that their business strengthened somewhat. Although financial services firms reported that activity had improved, a central Virginia broker commented that clients “remained conservative” and were evaluating alternative plans in case the economy worsens. Contacts at healthcare organizations noted little change in demand other than typical seasonal expansion. However, freight trucking firms reported slight softening in the industry. Service providers noted a minor pickup in the pace of price increases.
Finance. Reports on banking conditions varied widely since our last report. An official for a large bank stated that business borrowing softened over the last six weeks, while mortgage demand edged higher. A West Virginia banker said that home equity loans were down, in part due to consumers rolling that debt into their mortgage. A small commercial banker in Virginia described demand in general as improving slightly, but added that consumer loans were unchanged from “meager” levels and small business loans were virtually non-existent. Several loan officers noted that an exception to weak consumer demand was auto loans, but one banker said that even those had weakened in recent weeks. A credit union loan manager reported that consumer loan applications were up and he expected modest gains to continue. Overall loan demand strengthened, according to a northern Virginia banker, mostly for auto loans, home mortgage refinancing, and equipment purchases. Several officials also expressed concern that banks were increasing their risk by making longer termed loans in an effort to get higher yields. Yet, most bankers stated that the quality of their loan portfolio remained healthy, with few delinquencies in recent months.
Real Estate. Residential real estate activity improved modestly since our last report. A Realtor in the Richmond area said that closings were up double digits compared to a year ago. He noted that inventory is very low and prices continued to rise. A contact in South Carolina reported that the single-family segment in the Myrtle Beach market was particularly robust, although the area continued to work down a glut of inventory in the condominium market. A builder in South Carolina cited significant pent-up demand in the first time buyer segment, because many could not get financing, although the move-up market improved. Another builder in South Carolina stated that inventories were moving toward balance and he believed that a real recovery was underway. Similarly, another source reported that there was a steady, slow improvement, and that foreclosures were falling. A contact in Charlotte noticed more residential work in the high-end home category for the first time in more than three years.
Commercial real estate and construction improved slightly over the last few months. While some contacts stated that activity remained weak and little changed from the summer months, most contacts reported modest gains in at least some segments of their local market. A real estate representative in the Baltimore area said that her third quarter market report showed “grinding and gradual improvement,” with the majority of growth in the Baltimore-DC region. A developer in the Carolinas reported that absorption rates in the office segment were improving, even though vacancy rates remained elevated. Other contacts also noted tightening of available office space, especially among Class A properties, but attributed some of that gain to the lack of new construction. A Charlotte Realtor described his market as “choppy,” with downtown office space faring better than suburban locations. He also noted some tightening in industrial space, due mostly to expansion of distribution and call center demand. Several contacts, especially in Virginia, noted slight improvements in retail vacancy rates for restaurants and apparel stores. Most Realtors reported modest firming in leasing rates, although concessions on long-term leases were occasionally available. While several contractors noted a slowdown in government and education-related projects, private sector projects were edging forward, most notably for strip malls in underserved areas and for distribution centers near major retail markets. Additionally, a contact reported expanding activity at industrial and health care facilities.
Labor Markets. Labor markets were more negative on balance than in our last report. Employment agencies reported somewhat stronger demand for temporary workers, but reiterated their difficulty finding qualified workers to fill open positions in manufacturing, aerospace, defense, automotive, and construction. A contact in South Carolina said that labor demand remained fairly soft, with the exception of some IT positions, noting that hiring came to a stop in the third quarter. A Charlotte area temp agency executive reported that manufacturers were unwilling to hire long-term unemployed workers because their skills may have diminished. Manufacturers worried that taking on talent at reduced wages might lead to more turn-over when the economy picks up. A North Carolina contact commented that college graduates who were unable to find full-time work were choosing to remain on unemployment rather than take part-time positions. According to contacts, retail wage growth picked up, while wages at non-retail services firms rose more slowly; manufacturing wage growth also edged up.
Tourism. Most tourism contacts reported seasonally slower autumn bookings. Several added that, at this time of year, they focus on attracting tourists who are located within a day’s drive. There were scattered reports of storm-related hotel cancellations caused by Hurricane Sandy, as tourists from outside the District were affected by the weather at home. In addition, a couple of contacts noted some patches of beach and highway erosion on the Outer Banks of North Carolina and storm- related snow in parts of West Virginia, which might affect near- term visits. However, most planned events continued on schedule. A few District hoteliers stated that they were able to raise rates slightly since our last report.
Agriculture. Agricultural conditions prior to Hurricane Sandy remained favorable. Strong income boosted farm loan repayment rates. Lenders reported a drop in the number of loan renewals and extensions, even as spending for agricultural equipment rose. During October, beef prices rose as farmers struggled with higher feed costs―some producers culled herds, including breeding stock. More recently, Hurricane Sandy’s damage was minimal and localized mainly in coastal areas. In Maryland, an analyst reported that small grain emergence may be affected by standing water and salt water flooding. Snow and cold temperatures in North Carolina hindered farm activity and livestock producers were forced to begin feeding hay due to snow covered pastures; fruit production was not affected. In contrast, most farmers in Virginia were relieved that Hurricane Sandy brought much needed rain without significant damage to the corn and soybeans still in the field.
SOURCE: Federal Reserve Board