U.S. Federal Reserve Beige Book: Richmond District (Text)

The following is the text of the Federal Reserve Board’s Fifth District-- Richmond. FIFTH DISTRICT-RICHMOND

Overview. The District economy grew moderately overall in recent weeks, although activity varied by sector. Manufacturing production continued to expand but at a somewhat slower pace. Revenues at non-retail services firms steadied at moderate growth, and tourism strengthened. Retail sales contracted, with the notable exception of robust light vehicle sales. Lending remained stable, with a slight uptick in demand for residential mortgages. The residential real estate sector generally strengthened, and commercial real estate and construction markets improved. Cold, wet weather hindered spring plantings by farmers, while oil and natural gas production maintained a moderate pace during the past six weeks. Labor markets were mixed since our last report. Manufacturers’ input and finished goods prices moved up at a slightly slower rate, and wage increases also slowed. The pace of price change slowed at services firms, while wage increases in that sector were more widespread. Retail prices rose more slowly, and average retail wages declined.

Manufacturing. Fifth District manufacturing production expanded at a somewhat slower pace since our last report. A textile maker reported that his business was slow with the exception of automotive products. He expected a pickup in non-automotive business during the next few months, however. A producer of electrical components told us that business was poor in the U.S. but good in Europe and Latin America. Additionally, a textile manufacturer indicated that while sales levels had improved, his outlook remained cautious. Moreover, a dental equipment producer noted that work volumes had increased earlier this year, but that the market recently softened. On the other hand, a manufacturer of technical foam products commented that sales through the first quarter of 2013 had been solid and he expected a strong year. According to our latest survey, prices grew at a slightly slower rate for both raw materials and finished goods.

Ports. We received a variety of reports on District port activity. A port executive commented that European-bound vessels were leaving the port lighter than in the past, which he attributed to weaker economies there. In particular, exports of construction and agricultural equipment were down since the start of 2013. In a smaller District port, container shipments matched year-ago levels, while exports of lumber and plywood recently picked up, and corn and grain exports from the Midwest were up over last year’s low, drought-related levels. A contact in West Virginia remarked on port bottlenecks of coal exports. Container traffic increased at larger District ports, with continued strength in trade of auto parts. Drivers of import growth in recent weeks were consumer housing goods such as furniture and flooring. The inland port in Greer, South Carolina remained on target to officially open in the third quarter of 2013; that port is expected to shift cargo from trucks to railroads.

Retail. Retail sales fell in recent weeks in most categories, and shopper traffic was down. In Virginia Beach, a store manager at a chain discount store commented that persistent cold weather softened overall sales, particularly sales of seasonal items. In contrast, a few surveyed retailers and wholesalers in construction-related lines indicated that revenues rose over the reporting period. Also, auto sales remained constant at high levels. Consumer confidence, improved stability in middle-class home values, and low interest rates underpinned strong sales and good performance on auto financing. Contacts in the industry noted that used car prices remained relatively high, narrowing the spread relative to new car prices. Survey respondents indicated that overall, retail price increases were less prevalent since our last report.

Services. Activity at services firms remained steady at a moderate pace. Seasonal businesses such as tax services and landscaping reported higher revenues, while most other services providers noted little change. Prices at services firms rose at a slower pace, according to our latest survey.

Tourism generally increased over the past month, although most areas reported delayed spring weather. Cold weather in the nation’s capital moved the Cherry Blossom Festival’s peak bloom time into April. A contact on the outer banks of North Carolina commented that despite cool weather, Easter and spring break brought plenty of tourists. In addition, an upscale resort in western North Carolina had higher bookings. A contact in Charleston, South Carolina noted that the addition of a national airline is expected to strengthen the local hospitality industry. Several hoteliers and rental agents across North Carolina expected to be able to raise transient rates by three to six percent this year, but they anticipated a decline in government-rate bookings as a result of sequestration.

Finance. Loan demand remained relatively stable since our last assessment. Although most bankers reported a slight uptick in demand for residential mortgages, they noted that demand for both commercial mortgages and other business loans flattened. An exception was a banker in North Carolina who cited a modest increase in business loan demand driven by the need to replace assets. In addition, no significant changes in delinquencies or credit quality were reported, apart from improvement reported by an Eastern Shore banker and a West Virginia contact. Bankers indicated that competition continued to intensify, compressing already-tight margins. A few lenders said that their competitors were lowering collateral requirements and fixing interest rates for a longer period, just to close deals. Contacts also reported a decrease in customers’ willingness to take on debt. For example, a Virginia banker observed that prospective homebuyers now request a specific monthly payment and no longer inquire about the maximum amount for which they could qualify.

Real Estate. Residential real estate activity generally strengthened in this reporting period. A contact in North Carolina stated that residential real estate was booming and inventories were low. A Realtor in the Washington, D.C. area reported an increase in purchases for renovation and resale. He stated that inventory was down thirty-five percent from last year, and some developers were offering all cash, non-contingent contracts for well above list price. Similarly, a Realtor in the metro-Richmond area said foot traffic rose, which he attributed to the limited supply of homes, pent up demand, and low interest rates. A contact in Charlotte reported that low inventories of residential building materials had put building permits on hold. Similarly, a source in Hampton Roads, Virginia reported that sequestration had put potential buyers on the sidelines.

Commercial real estate and construction markets improved since our last report. A Richmond Realtor reported a steady increase in leasing activity. A source in Charlotte cited a rise in land and retail investment transactions and more hospitality-related renovations. Most contacts described a tight supply of Class A office space, with positive absorption and declining vacancy rates. Several Realtors said that discounts could still be found for Class B or C space. A representative of a large construction firm in Baltimore reported that activity was very strong, especially for healthcare buildings and data centers, and the outlook was “extremely positive.” A contact in the Washington, D.C. area also reported several large projects under construction.

Agriculture and Natural Resources. Cold temperatures and wet weather delayed land preparation and hindered spring plantings in the agricultural sector. Hay supplies were running low in some regions, resulting in higher demand for supplemental feeding. However, a contact on the Eastern Shore of Maryland stated that poultry production and agriculture were doing well, grain and land prices were good, and the overall outlook was positive.

Conventional oil and natural gas production maintained a moderate pace and the rig count in West Virginia was little changed since our last report. Coal production declined. A source in West Virginia attributed the drop to displacement of coal by natural gas, although coal exports had partially offset lower domestic demand.

Labor Markets. Assessments of labor market activity were mixed since our last report. On the one hand, manufacturing firms in the Carolinas reported temporary layoffs due to softness in orders, and contacts in sectors from real estate to wholesale trade to manufacturing said that they were reducing staff or not expanding due to the Affordable Care Act. On the other hand, a Maryland firm planned to add 200 to 250 engineers as a result of the recent pick-up in construction, and a lumber firm increased its average employee work week. Moreover, contacts from a number of temp agencies cited stronger demand for workers, resulting in part from uncertainty about federal fiscal policies. The highest demand was for information technology workers; short supply pushed up their wages. Demand for telecommunication workers picked up, as carriers upgraded systems. Additionally, demand for automobile industry workers strengthened. According to our latest surveys, average wages at non-retail services firms rose more quickly, while manufacturing wages rose at a slower pace in recent weeks and retail wages declined.

SOURCE: Federal Reserve Board

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