U.S. Federal Reserve Beige Book: Richmond District (Text)
The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Economic conditions in the Fifth District improved moderately since our last report. Manufacturing shipments and orders rose, and capital spending increased. Retail weakened, with the exception of robust auto sales. Revenue growth was strong among non-retail services firms and tourist destinations reported good attendance. In banking, lending activity slowed somewhat under the pressure of higher interest rates. Residential real estate and construction activity varied, while commercial real estate and construction markets were little changed. Heavy rains in the Mid-Atlantic hindered harvests and raised concerns about crop damage. In energy markets, natural gas production increased sharply as more infrastructure came online; in contrast, coal mining declined. Conditions in District labor markets improved modestly. Growth in manufacturing prices for inputs and finished goods slowed; service sector price increases also slowed. Average wages rose in both sectors.
Manufacturing shipments and orders rose moderately, and reports of greater spending on plant and equipment increased. Producers of auto parts, plastics, and textiles were buying machinery. A lumber company executive said his business had purchased new equipment to increase production in response to higher order volume. Another contact indicated that demand had picked up for mid-range and high-end cabinetry. In contrast, a furniture producer reported that all employees had to take unpaid time off in recent weeks, and a machine parts manufacturer worried that he might have to begin layoffs by early autumn. According to our latest manufacturing survey, growth slowed in prices of both raw materials and finished goods.
District port contacts indicated that bulk and container shipments grew briskly in recent weeks. Agricultural products accounted for much of the increase in exports, while auto-related products were a large share of the growth in imports. Coal exports declined in recent weeks while remaining slightly up for the year. The ports’ peak season began in July, as retail imports allowed stores to stock up for the holidays. Port officials were monitoring developments in the Middle East closely because the Suez Canal is a “vitally important artery” for shippers.
Sales revenues weakened since our last report. Retail and wholesale suppliers of construction inputs gave mixed reports. A West Virginia building materials wholesaler commented that his sales were flat and cautioned, “Contractors who normally have a six-month backlog of work are down to two months.” Several grocers, convenience stores, and pharmacies also reported flat sales, while sales at art and hobby shops and an electronics retailer declined. Auto sales were strong; a dealer in West Virginia remarked that his dealership had its best thirty days ever this summer and a dealer in the Washington, D.C. beltway area said his sales doubled compared to this time last year. He noted, however, that purchases were based on need, rather than discretionary spending. Average retail price growth picked up slightly. In particular, a grocery wholesaler noted gradual but steady increases in his cost of meat, poultry, and seafood.
Non-retail services firms reported generally robust growth in recent weeks. Among the categories noting stronger revenues were architectural services, IT, business law, advertising, and accounting. A financial services executive reported that clients were becoming more aggressive with respect to the amount of risk they would assume while remaining “a little nervous under the surface.” Construction-related businesses such as contracting reported more bidding opportunities and project starts; several also commented that they were able to pass along rising input prices. Healthcare organizations reported softer demand and many were making cost reductions to help offset lower reimbursements, sequestration, and uncompensated care. Smaller hospitals continued to express concern about their viability under the Affordable Care Act, and the solution for some has been to pursue affiliation with a larger healthcare system. Growth in overall services prices slowed.
Tourism representatives reported strong attendance at resort locations. Year-over-year National Park visits in the Washington, D.C. area increased. A contact on the outer banks of North Carolina indicated hotels bookings were up and rentals were good, albeit not quite “the banner year” people had expected. She noted that restaurants were generally busy, although budget-conscious tourists were primarily frequenting “tapas and deck parties” instead of fine dining establishments. A resort executive in western Virginia reported that occupancy rose and revenues increased by double digits over this time last year. He observed that “the family vacation seems to be coming back.” In central North Carolina, an hotelier reported that corporate bookings were up, while government stays fell.
The pace of growth in District lending slowed somewhat as many bankers reported a drag from higher interest rates. On the business side, contacts generally indicated that any adverse impact from the modest increase in interest rates was being offset by expectations for better economic conditions and stronger profit growth. One banker flatly stated that “CFOs understand that rates remain near historically low levels.” Small business loan volumes increased modestly. A lender in the D.C. area noted that some small businesses that wanted to grow were looking to do so through acquisitions. Most banks reported no changes in standards and terms for business loans, although competition was reportedly testing lenders’ discipline. New residential mortgage lending was said to be holding up, but virtually every banker said that refinancing had slowed. Overall, mortgage loan volumes were reported to be modestly lower. Demand for other types of household loans held fairly steady, and metrics of consumer credit quality displayed fewer signs of duress.
Reports on residential real estate and construction activity were more varied since the last survey period. Several Realtors said that demand for owner-occupied homes remained firm and a dearth of quality inventory was leading to fewer days on the market, more multiple offers, and higher selling-to-asking price ratios. Some reports suggested that rising home prices and mortgage interest rates may have boosted demand in the near term as many “fence sitters” were moved to make a decision. While homes remained affordable, one contact said that “they aren’t the screaming bargain they once were.” Residential construction activity increased at a slower rate. A homebuilder who develops in the Carolinas reported that sales and traffic through models edged lower since our last report, although he could not determine if this was due to higher interest rates or a typical summer lull. A builder in Northern Virginia noted a similar slowdown, but added that activity had picked up in early August as potential homebuyers adjusted to higher mortgage rates. He expected that strength to be sustained.
Commercial real estate and construction markets were little changed in recent weeks. Contacts in most areas reported that vacancy rates continued to decline modestly in office and industrial markets, while retail vacancies remained very low. There were a few suggestions that rents were firming and several real estate professionals noted that landlords were offering fewer concessions to potential tenants. Given the rather steady improvement in vacancy rates, and lack of construction in recent years, respondents in many areas expected commercial construction to pick up momentum in late 2013, particularly in the office and industrial markets.
Agriculture and Natural Resources
Heavy rains in the Mid-Atlantic delayed the harvest of some grains and hay cutting, particularly in the lowlands of the Carolinas. According to one source, cotton, peanuts, and soybeans might be damaged by the unusually high levels of precipitation. Another contact in South Carolina noted that some late crops could not be planted and root systems of plants in the ground have not developed well because of the rain. He added that cotton and tobacco crops “do not look good at all.” A number of contacts noted that corn prices had risen and were expected to remain high for some time. Prices of beef and pork were also up, according to sources. Poultry farming and fruit production were strong in recent weeks. Results of our recent agricultural credit survey indicated that farmland values remained relatively constant since the beginning of this year.
Natural gas production increased sharply as more infrastructure came online. An industry executive expected production and rig counts to continue to rise. Another contact stated that demand for District coal had declined further since our last report, idling some mines and resulting in large layoffs.
Labor market conditions improved modestly since our last report. Employment increased in most areas. Demand increased for workers in financial services, accounting, IT, health services, and manufacturing. Reports of difficulty finding workers with the “correct” skills were widespread, and a West Virginia contact commented that it was difficult to find people “at any price.” A Virginia executive noted that workers went from temporary to permanent employment more frequently, while a source in North Carolina indicated that temporary assignments were lasting longer than they did a year ago. Our most recent survey results were generally consistent with other accounts: hiring increased somewhat at manufacturing and non-retail services establishments, while retail employment declined slightly. Average wages rose in the manufacturing and service sectors, including retail.
SOURCE: Federal Reserve Board