U.S. Federal Reserve Beige Book: Richmond District (Text)
The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Overview. District economic activity grew moderately since our last report. Manufacturing strengthened somewhat in recent weeks. Tourism also picked up, while other non-retail services providers reported that activity grew at a slower pace. Retail sales rose, although auto sales slowed slightly from previous high levels. Lending activity increased marginally, with a slight uptick in demand for commercial and residential mortgages. Residential real estate activity grew at a modest pace, and commercial real estate and construction markets improved. The agricultural sector remained strong, while oil and natural gas production eased during the past six weeks. Labor markets were generally flat since our last report. Manufacturers’ input prices rose at a slightly slower rate, while finished goods prices were little changed and the pace of wage growth held constant. Price growth at non-retail services firms picked up slightly in recent weeks, while wages in that sector advanced more quickly. Retail price increases slowed, and average retail wages rose more quickly since our last report.
Manufacturing. Fifth District manufacturing activity showed some signs of strengthening. A producer of lumber products reported that the month of January was the best in more than five years, and a furniture manufacturer said that there was a firmer tone at his company as measured by product quotation requests. A manufacturer of polyester film told us that overall demand had increased, but he could not yet raise prices and margins continued to be squeezed. He noted that customers were not making long-term commitments and they continued to worry the sustainability of the positive economic trend. A textile manufacturer noted that uncertainty around his government-related contracts could lead to layoffs, although his non-government business was strong. According to our latest survey, raw materials prices grew at a slightly slower pace, while finished goods prices were little changed.
Ports. District port administrators reported strong container traffic in recent weeks. Exports of agricultural and chemical products coming from the Gulf states and the Midwest rose, and port administrators expected a general pick-up in activity in March. Automobile imports slowed in January and February after finishing 2012 on a high note. Exports have led imports so far this year, although exports of equipment for construction and agriculture slowed as last year’s capital restocking abated. The Chinese New Year on February 10 resulted in only a few port of call cancellations because of plant and port shutdowns in China. After months of extensions, concerns about dockworker contract negotiations generally lessened since early February, although contracts have not yet been finalized.
Retail. Retail sales strengthened in recent weeks. Survey respondents in food sales, pharmaceuticals, and home and garden centers reported higher revenues in February. A building supply wholesaler commented, “Things are on the mend.” Sales of automobiles and light trucks remained strong, even as the pace slowed slightly from last year’s robust levels, according to dealerships in several locations. An auto dealer in West Virginia described sales as “plugging along.” Growth in retail prices slowed since our last report.
Services. Activity in the service sector grew at a slower pace in this reporting period. Survey respondents at law firms, marketing firms, and nursing homes reported slower growth. In addition, executives we contacted at freight trucking firms reported little change in new demand in January and February, with increased business attributed to gaining a larger market share. Financial services firms also noted little change, although a broker at a Virginia firm remarked that his clients were feeling a bit more optimistic. Prices in the sector rose slightly faster.
Tourist activity picked up, however, according to a contact on the outer banks of North Carolina, with a strong Presidents’ Day weekend and solid advance reservations for the summer. Further inland, a hotel and conference center manager noted stronger convention bookings. In West Virginia, winter weather helped boost activity at a mountain resort. Rates were generally flat.
Finance. Lending activity increased marginally since our last report. Most bankers reported a slight uptick in demand for commercial and residential mortgages. Refinancing constituted a significant portion of this demand, primarily due to low interest rates. Officials from both a large commercial bank and a small community bank noted that the demand for refinancing also was driven by five year balloon payments coming due. In contrast, a North Carolina banker reported a slowdown in refinancing due to an increase in interest rates. Commercial loans rose modestly, although demand remained weak. Several bankers in West Virginia noted that there has been a reluctance to invest due to uncertainty about federal policies. A contact noted, “the best customers are not borrowing and are very liquid.” However, other District bankers were cautiously optimistic about the future and growth in their loan portfolios. In addition, lenders noted minor improvement in credit quality and delinquency rates. On the consumer side, demand for loans remained flat. Bankers remarked that competition was increasingly aggressive.
Real Estate. Residential real estate activity generally grew at a moderate pace since our last report. A contact in North Carolina stated that the housing recovery “is real, although modest at this point.” He cited firming sales of new and existing single-family homes, falling inventories, and recovering resale prices as signs of improvement. A Realtor in the Washington, D.C. area said that continuing low interest rates coupled with decreasing inventory had created a very competitive market, which often led to multiple offers. Similarly, a Realtor in the metro-Richmond area indicated that low interest rates continued to motivate home buyers, and that many areas around Richmond had less than two months of supply. In Charleston, South Carolina, a Realtor told us that the housing market had regained some stability and that in 2012, for the first time in five years, more than 10,000 homes were sold. In contrast, a contact in the Charlotte area mentioned that people were adding rooms to their homes, rather than buying and moving. He noted that in the past, homeowners chose renovation projects based on the expected effect on the market price. Now, he said, they build for themselves and stay put. In Maryland, a source reported slow recovery in the housing sector with fewer days on the market and added that housing prices had stabilized.
Commercial real estate and construction markets improved somewhat since our last report. A developer in the Carolinas said that leasing activity continued at a reasonably healthy pace, while a Richmond Realtor stated that tenants were trying to hedge based on the economy. He noted that companies didn’t want to commit to more than a five-year lease with the right to cancel at three years.
Most contacts continued to describe the supply of Class A office space as tight, which they attributed to the absence of new construction. Several Realtors reported that rental rates had firmed in the market with property owners keeping rents firm and minimizing concessions. A source in Charleston, South Carolina cited heightened industrial sales due to attractive lending rates. He indicated that vacancy rates had declined and that a couple of build-to-suit projects had positive absorption.
Agriculture and Natural Resources.
The agricultural sector remained strong, while energy production declined slightly. Results of our most recent agricultural survey indicated that farmland values were above both the previous quarter and year-ago levels. In addition, most contacts noted that 2012 was one of the best years that farmers have ever had; they indicated that higher commodity prices had resulted in stronger cash positions. Several forestry contacts reported a pickup in lumber prices due to the uptick in the housing sector.
Although conventional oil and natural gas production fell slightly since our last report, the rig count held steady in West Virginia. Coal production continued to fall, due to declining prices for natural gas and stricter environmental regulations. A manufacturer of equipment used in the coal extraction process pointed out that while the environment in the coal mining industry had been challenging, there is tremendous growth potential for coal producers in the global market, particularly in sales to China, India, and Germany. Another source stated that coal exports were up and that a coal operator who had never sold overseas before had thirty percent of sales in export markets for this year.
Labor Markets. Labor market activity was little changed since our last report. Hiring remained flat across most sectors, although there were some exceptions. Employers across the District continued to cite the Affordable Care Act and its unknown impacts as reasons for planned layoffs and reluctance to hire more staff. In contrast, expansion by a software developer in North Carolina will bring new jobs, and contacts in the service and manufacturing sectors reported a demand for engineers and skilled labor, although they also expressed some difficulty in finding such workers. An agent from Maryland reported increased demand for temp workers, particularly in the manufacturing sector. According to our latest survey, average retail wages rose quickly and average wages at non-retail services firms picked up moderately in recent weeks; hiring, however, was still soft. In the manufacturing sector, employment strengthened over the last month, while wage growth remained modest.
SOURCE: Federal Reserve Board