U.S. Federal Reserve Beige Book: Richmond District (Text)
The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Economic activity strengthened modestly across the District, however growth was constrained by softness in manufacturing, federal spending limits, and unusual weather conditions. Retail sales flattened, although auto sales generally remained strong. Business was also strong at most non-retail services firms, but tourism in some areas fell below expectations as a result of an unseasonably cool spring. Banking conditions were mixed; residential mortgage demand increased, commercial lending varied, and competition for business was sharp. Residential real estate prices strengthened. Commercial real estate construction also improved, with positive reports across the District. Heavy rainfall and fluctuating temperatures delayed spring plantings, but forage crops were developing well. In the energy sector, demand continued to shift from coal to natural gas. Labor markets were uneven, although many employers plan to increase hiring in the months ahead. Reports on prices and wages were mixed.
Fifth District manufacturing activity softened since our last report, although there were scattered reports of improvement. A machinery producer said that his company was struggling to hit the break even mark again this month and that the volume of new orders was down considerably. Impacts of sequestration and tax changes were noted by several firms. A manufacturer of automobile convertible tops reported that the uncertainty of tax issues had slowed investment at his firm. Moreover, a producer of defense equipment cited government sequestration and orders being canceled or delayed as major concerns facing his company. In contrast, a lumber producer mentioned that, because of the improvement in the housing market, his company had earned a profit in the first four months of this year, and a flooring manufacturer also reported improving business. Price growth in raw materials slowed in recent weeks and finished goods prices grew at a somewhat quicker pace.
Shipments increased at District ports, especially for container exports. Specialty chemicals were particularly strong, and one contact noted that pharmaceutical manufacturers were changing from air to ocean transport as rising fuel costs drive up air freight rates. Both auto exports and imports were robust. Furniture and flooring imports were up overall, and imports of auto parts remained solid. Port administrators commented that more manufacturers were evaluating plans for moving product through the ports as they plan to shift production to this country. Some port officials are considering how to better accommodate large container ships coming to the East Coast via the Suez Canal. Those ships have nearly double the container capacity of ships that could pass through the Panama Canal. However, one port contact expressed concern that the current truck driver shortage could slow container shipping.
Retail sales varied by category but were flat overall since our last report. Several contacts told us the unusually cool spring weather held down sales. Retailers commented that their labor costs were rising as a result of the healthcare legislation, leading them to change employees’ hours. The manager at a discount chain store in the Tidewater region of Virginia noted that her store was “struggling” to make sales goals. In contrast, a central Virginia retail contact observed “less of a roller coaster” in retail sales than a year ago, noting stability and even strength in categories related to home
building and home sales, such as furnishings and decorative accessories. Auto dealers reported that availability of used cars improved since our last report. Auto sales remained generally strong for both domestic and imports. Surveyed contacts indicated that retail price increases slowed in recent weeks.
We received reports of renewed vigor at non-retail services firms. Architectural and technology services were among the firms noting increased revenues. A financial services contact commented that his clients were “feeling good” as asset values rose and real estate improved, leading them to free up and move cash. Although healthcare organizations reported stable demand, executives in some areas remarked on financial pressure from the decline in their Medicare and Medicaid reimbursement under the Affordable Care Act. Prices at non-retail services firms edged up slightly faster.
Reports from the tourism industry were mixed. Resorts in Virginia and North Carolina had good growth in bookings, and business was up for full-service conference space. However, unseasonably cool weather reduced weekend stays at a West Virginia resort and lessened weekend traffic on the Outer Banks of North Carolina. A contact in Washington, D.C. said visitor traffic remained consistent, but that some summer activities could be affected by reductions in security staffing under the federal budget cuts. Hoteliers anticipated a solid finish to the summer months, and most had raised rates slightly.
Reports on banking conditions varied since our last assessment. Demand increased for residential mortgages. Refinancing was strong in North Carolina, whereas lending in Virginia went primarily to new home purchases. Across the District, the limited increase in commercial mortgage activity was generally confined to refinancing existing loans from other institutions. Nevertheless, a bank official in North Carolina noted a pick up in demand from home builders, and said that his bank was reconsidering whether their credit standards were too tight given the improving economy. The demand for commercial and industrial loans was weak, according to lenders in South Carolina and West Virginia, due to customers’ high cash balances and low confidence. However, bankers in North Carolina and Virginia saw an uptick in activity. Several lenders commented that competitors continued to offer very low rates that “made no sense” in an attempt to take away business.
Residential real estate activity strengthened in recent weeks. A contact in Hampton Roads, Virginia reported that contracts were up twenty-two percent over a year ago and that inventories were low. She added that buyers were looking for owner-occupied homes in good condition and noted that multiple offers were driving up prices. Similarly, a Realtor in the Washington, D.C. area described the market as “accelerating,” noting that decreasing inventory had led to multiple offers and higher selling prices. A Richmond Realtor mentioned that new construction demand had increased, which had pushed up the prices of building lots. A homebuilder in South Carolina reported an increase in lot shortages. His company raised prices on single family homes this year to offset supplier price increases.
Commercial real estate and construction markets tightened slightly in recent weeks. A commercial Realtor in Charleston, South Carolina said that activity had improved and that he expects nonresidential construction to increase significantly in the next twelve to eighteen months. He also stated that the region is on the precipice of strong growth but will be limited by infrastructure. A source in Richmond expected further improvement in commercial real estate activity during the next year, noting a rise in construction in the Richmond and Hampton Roads regions. According to a contact in West Virginia, more hotels have come online and retail space was absorbed at a faster pace. Leasing there has risen to pre-recession levels, according to one report. With vacancies declining and increased demand for space in many areas, commercial lessors have stopped granting concessions. There is strong demand in the Baltimore corridor for multi-family rentals and purchases, with occupancy rates at 95 percent. Another source said that the Washington, D.C. market was growing with a concentration in rentals, but that there was little speculative building.
Agriculture and Natural Resources.
Fluctuating temperatures coupled with heavy rainfall tempered plant growth and delayed spring plantings throughout the District. Despite wet conditions, forage crops were having a great spring, and pastures and hayfields were in good condition.
Assessments of energy activity were mixed in this reporting period. The coal industry remained depressed and businesses that supplied the industry were negatively impacted. A source in West Virginia said that reduced coal production led to a decline in diesel fuel sales as more heavy equipment was idled. He indicated that natural gas had displaced coal in power plants due to the low price of natural gas and concerns regarding environmental regulatory changes. He noted that some of the decline in domestic coal demand was offset by increased thermal coal exports to Europe.
Labor activity was uneven, although contacts were upbeat about additional hiring in the months ahead. A manufacturer in North Carolina laid off employees because of fewer federal orders. However, an auto dealer in the Washington, D.C. area noted that he had to hire more sales people, and a flooring manufacturer said he added an additional large crew at one of his plants. A national trucking firm executive remarked that implementation of new federal restrictions on driver hours of service will exacerbate the shortage of drivers for long-haul trucking. Further, a temp agency in Maryland saw somewhat stronger demand for workers in most industries. Contacts in the tourism industry indicated that seasonal hiring was about on par with a year ago, and permanent jobs were plentiful in locations along the outer banks of North Carolina. Looking ahead, firms in several categories expected to increase hiring. For example, a lumber firm expected to hire more workers later this year, and a West Virginia manufacturer planned to add jobs early next year as a result of reshoring. According to our latest surveys, manufacturing employment edged down and average wage growth slowed. Retail employment declined, but wage increases were more prevalent. Hiring flattened at non-retail services providers, while average wages rose.
SOURCE: Federal Reserve Board