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 improved somewhat in most sectors since our last report, although manufacturing and employment weakened. Retail sales improved, and non-retail services providers reported a moderate increase in demand. Tourism contacts generally indicated that summer business was strong, and they anticipated a busy autumn season. Widespread precipitation in July and August brought relief from drought conditions, boosting expected crop yields. Residential real estate activity inched up, while commercial real estate reports were mixed. Lending activity also varied, and most mortgage lending was for refinancing. Manufacturing activity softened as orders declined. Weaker District hiring was led by a slowdown in requests for temp workers, although demand for highly skilled employees persisted. Price changes generally slowed in both the manufacturing and services sectors, with the exception of a small uptick in retail.
Manufacturing. District manufacturing activity continued to decline since our last report. A manufacturer reported that demand fell sharply for heating equipment components, with domestic and European customers both reducing their orders. An auto supplier also reported a significant drop in new orders in the past two months. Another auto parts manufacturer stated that earlier in the year, demand for his components was growing, but now orders were “treading water.” He added that inventories were rising and he expected to cut production. A food manufacturer reported that power outages from recent storms resulted in a one-week shutdown, and production did not return to normal for over three weeks. According to our latest manufacturing survey, growth in raw materials prices slowed over the past month, while finished goods prices edged downward.
Retail. Retailers reported improved sales since our last report. Merchants in several states had a successful “tax free weekend” in early August. In addition, some department store contacts said they were able to clear inventories of patio furniture and other seasonal items. Several jewelry retailers also reported increased sales. Record heat this summer helped to push air conditioner sales, with one big-box store depleting its entire inventory. An auto industry contact reported that District sales grew at a somewhat slower pace in recent weeks, although demand remained especially strong for mid-size vehicles. Used cars remained in short supply, putting upward pressure on prices and improving trade-in values. A number of apparel and furniture contacts noted that inventories for the upcoming holiday shopping season will be kept tight, since they expect to be able to easily reorder as needed. Grocery executives expected price increases in meat and dairy products, due to rising feed costs caused by drought. The pace of retail price change rose moderately, according to our most recent survey.
Services. Accounts from non-retail services firms were generally positive in recent weeks. An executive at a North Carolina healthcare system reported that demand for services had been steady, adding that there were a few “sparks” from the arrival of new businesses in an otherwise stagnant local economy. Contacts at healthcare organizations expressed concern about potential Medicare reimbursement cuts that will come with the change to value-based metrics under the new healthcare legislation. Ground freight firms reported solid demand and higher shipping rates. A freight service executive reported that retailers increasingly have moved to an online presence in addition to in-store sales, contributing to growth in direct shipping to customers through internet sales. Technology services continued to be in strong demand, particularly for developing websites, mobile services, and cloud computing. On balance, responses to our recent survey were that price increases at services firms moderated since our last report.
Finance. Banking activity was little changed from the weak, but somewhat mixed conditions that prevailed in our last report. Most bankers said that very few new loans were made recently and the number of loans in the pipeline was shrinking. An often- cited exception was mortgage refinancing, as well as business loans that were captured from other banks by offers of better terms. However, several mortgage lenders noted some increase in new home loans, especially in the mid-priced range, and one official reported a modest increase in single-home construction loans. A Maryland banker cited a sharp increase in small business loans, but several other bankers stated that many small business loan applications did not meet lending standards. A lending officer in northern Virginia reported a slowdown in industrial loans due to rising economic uncertainty. A banker in West Virginia noted strength in industrial loans going into the state’s energy sector, although he expected lending to decline after the completion of current mining projects. While margins continued to be squeezed, most bankers described loan quality as stable following several quarters of steady improvement.
Real Estate. Residential real estate activity continued to improve since our last report. A Realtor in the Richmond area said that sales were up double digits over last year and pending sales had increased sharply from a year ago. Moreover, his company had seen a marked increase in prices. An agent in the D.C. area also reported strong sales “inside the Beltway.” A Realtor in the Fredericksburg area indicated that sales had increased and traffic was very active for this time of year, noting that the average sales price had risen by about $40,000 over last year. She mentioned that her firm had seen virtually no listings of foreclosed properties in July, and she saw fewer short sales. A West Virginia developer, who specializes in second homes in the mountains, stated that there had been an increase in inquiries and contracts for homes after four years without any sales. Similarly, a contractor reported a solid increase in home sales in the Charleston, South Carolina area, with the average price of new homes sold rising slightly as well. Commercial real estate activity remained mixed over the last few weeks. A few Realtors pointed to companies that were downsizing their space requirements as a cause for limited new construction and high vacancy rates. An agent in the D.C. area reported a recent drop in office leasing activity by as much as half from year-ago levels. However, several Realtors noted that, due to the lack of office construction, landlords had been offering fewer incentives to capture or retain tenants at existing properties. Retail leasing activity was mostly described as weak, especially among small, locally owned businesses. A contact in northern Virginia noted weakness in many segments of the market, but notable exceptions included car dealerships, gas stations and doctors’ offices. A North Carolina real estate agent reported that purchasing activity had picked up markedly among his investment clients, which he attributed to national firms being increasingly attracted to the region. A few pockets of improvement in both leasing and construction activity were noted in eastern South Carolina, which has benefited from an expansion in the aerospace industry, and in northern West Virginia, where gains were driven by natural gas drilling.
Labor Markets. Labor market activity weakened since our last report. Contacts at several employment agencies described demand for workers as softening in the past six weeks. In Richmond, several small retailers said that they did not hire summer workers and they were not planning additional hiring for the year-end holiday selling season. One agent noted that demand was slightly below normal for this time of year, but he hoped to see a rebound similar to the one that occurred late last summer. However, a few pockets of strength persisted. For example, most employment agencies continued to report strong demand for highly skilled IT employees, as jobs created by new technologies drove the market for those workers. Additionally, several contacts noted an increase in demand for truck drivers. According to our recent surveys, wages in both the manufacturing and service sectors were growing at a slightly slower pace than a month ago.
Tourism. District resorts reported a very good summer season, with rentals and hotel bookings up from a year ago. Local restaurants and shops have been busy, and a contact on the Outer Banks of North Carolina said that new businesses were opening to serve vacationers. Cruise ships leaving the Port of Baltimore have been fully booked, according to a contact there. In Washington, D.C., a contact observed more tour buses in recent weeks and bigger weekend crowds on the National Mall. However, according to a couple of Baltimore hotel managers, bookings for conferences and leisure stays were mixed. Additionally, a hotel contact in the Virginia Beach area said that bookings were making “no great strides,” primarily as a result of government travel cuts. Despite the lack of momentum in government travel, most hoteliers said that they were able to raise rates slightly. Looking ahead to late autumn, executives were optimistic about bookings, as localities planned historical commemorations, music programs, food festivals, marathons, and other social events. In South Carolina, a hotel manager anticipated that a new carrier at a nearby airport would provide solid bookings in the months ahead.
Agriculture. Widespread precipitation since our last report helped revitalize crops and pastureland in many areas of the District. Rain in early August aided late summer peaches in Maryland and West Virginia, and soybeans were responding to improved weather conditions in Virginia. Cotton and peanut growers in the District are also having a great year. In South Carolina, the cantaloupe and watermelon harvest was virtually complete by early August. Results of our recent agricultural credit survey indicated that farmland values were above both the previous quarter and year-ago levels.