December 4, 2013
The District economy expanded moderately in recent weeks. The manufacturing sector strengthened, with a notable increase in shipments and new orders. Retail sales also picked up since our last report, driven by big-ticket sales. Auto sales remained solid. At non-retail services firms, reports were mixed. Tourism varied, with reduced or cancelled government bookings dragging down an otherwise positive report. Consumer lending activity weakened, while commercial lending improved. Residential real estate markets slowed, with little change in new construction. Commercial real estate markets were stable with most of the new construction centered in multi-family housing. Commercial leasing demand was relatively unchanged since our last report. Farming yields varied, with a record high corn harvest. Natural gas production continued to increase, while coal declined. In District labor markets, both permanent and temporary employment improved slightly. Average wages rose more quickly. In manufacturing, price increases moderated for both inputs and outputs. Retail and non-retail services prices also increased at a slower pace.
Manufacturing
Manufacturing strengthened since our last report. Shipments and new orders had a sizable increase according to our survey respondents. A lumber contact located in North Carolina stated that inventories of raw materials and finished goods are being managed at correct levels and that 2013 appears to be headed for a good profit year. He further expects continued improvement in new home building. A manufacturer of airflow measurement devices stated that his sales volume was up two to three percent year to date, despite short-term volatility. A fabric manufacturing company in North Carolina also reported a recent upturn in business, but noted that costs had increased. According to the latest manufacturing survey, prices of raw materials and finished goods rose more slowly compared to last month.
Ports
Port activity continued to be robust. Larger ports saw strong container traffic; an official at a major District port noted that exports of containerized grain have been growing every quarter and that housing-related imports such as flooring were up year over year. Coal exports rose during the last month at one port, but were nearly flat for the year so far, while declining elsewhere. Food and beverage imports were strong, and both imports and exports of products such as apparel, toys, and electronics grew "at a good clip." In the last several weeks, import and export traffic of autos and auto parts remained strong overall. According to our contact at a mid-sized port, container traffic was steady.
Retail
Retail sales were moderately stronger at most establishments in recent weeks, particularly for big-ticket items such as furniture and appliances. However, executives at a few department stores reported little change in sales or foot traffic. A department store executive in West Virginia remarked that he was "being squeezed" by internet competitors. Compared to a year ago, retailers generally expected little growth in holiday sales and sales of gift cards. In contrast, a manager at a chain discounter commented that current sales were lackluster, but lay-away at the store was very busy. Most retail contacts said their holiday inventory levels were about the same as a year ago. Merchants were split on whether they would have more promotions and discounting than last year. Auto sales remained solid, although a few dealers noted some slowing. Average retail prices rose more slowly since our last report.
Services
Reports from non-retail services firms were mixed. Telecommunications firms reported growth, with a North Carolina source commenting in particular on growth in server farms. A financial services executive commented that his clients were cautiously moving forward with investments, but that they remained hesitant. An executive at a national trucking firm reported that business was consistent with no changes in pricing or capital expenditures. However, construction-related businesses, such as HVAC, reported flat revenues in recent weeks and several restaurant executives indicated that sales were down. Prices in the service sector rose at a slower pace.
Tourism reports also varied, with some hoteliers reporting cancellation of large government bookings. An executive at a resort and conference hotel in central Virginia remarked that he can no longer count on group clients booking multi-year contracts for regular conferences because of the firms' budget uncertainty over healthcare costs. In contrast, a resort executive in western Virginia reported that colder weather expectations have raised ski bookings compared to recent years, and weather conditions have allowed snow-making at Thanksgiving. The strength in bookings has allowed the resort to raise some rates for the first time in several years. A contact on the outer banks of North Carolina also reported strong house rentals and hotel bookings for Thanksgiving; several hotels there offered Black Friday specials.
Finance
Consumer borrowing weakened slightly throughout the district since our last report. Several sources indicated that residential mortgage lending has declined in response to higher rates and tighter restrictions from the Qualified Mortgage rule. Further, a banker stated that consumers are reluctant to apply due to their perception that loans are becoming more difficult to obtain. Competition among bankers has risen, with lenders offering incentives such as including closing costs. Also, the consensus felt that the credit quality of applicants has slipped mildly as "stronger applicants are drying up." On a positive note, one central Virginia lender reported seeing an uptick in new construction loans. In addition, all sources reported that delinquency rates have improved. Commercial lending competition increased, leading to some easing in credit quality standards. Rates have remained flat, and lenders reported that businesses are increasingly interested in buying the buildings they are leasing.
Real Estate
Residential real estate markets slowed slightly in the past month. Realtors reported a slight increase in sale prices. A Realtor from South Carolina reported an upward trend in sales of entry level homes, and a slow-down in sales of mid- to upper-level homes in the past few weeks. On the other hand, a Northern Virginia Realtor reported a slight decrease in sale prices and thinks there could be another small decrease in the next few weeks. Average days on the market were generally unchanged from last month, although both South Carolina and North Carolina contacts reported a slight increase due to reduced buyer traffic. In contrast, a real estate broker located in Charlotte said relocation referrals were up in the last four to six weeks, and an agent in Greensboro stated that buyers in his region are feeling more confident and that there is a shift towards a more balanced market. Home inventory throughout the District is tight, although a central North Carolina real estate agent told us the supply of town homes and condos is adequate in his region. New construction changed little from a month ago.
Commercial real estate markets have remained stable throughout the District, with continued strength in multi-family construction. A broker in Richmond reported that commercial development in multi-family housing continues to be strong both in new construction and rehab of older buildings. Construction activity generally flattened in the Carolinas and West Virginia. Another Richmond agent reported new construction in retail, anchored around large stores and food retailers, with some pickup in residential development. A Virginia Beach Realtor reported steady construction activity in office and retail. A broker in that area stated that demand is primarily in the small to medium size range except for a couple of big box retailers. Realtors report a slight decline in Class A office space, but availability varied greatly by submarket. A Roanoke, Virginia Realtor reported a shift to Class A space in suburban markets due to the expansion of professional services, and a Realtor from Columbia, South Carolina has seen high demand for Class A space in the central business district. Realtors throughout the district reported that office tenants were downsizing and focusing on space efficiency. A commercial Realtor in Charlotte, North Carolina reported new construction plans in the health industry and suburban office buildings. Commercial leasing remained largely unchanged since the last report, with the exception of a mild pickup in the industrial market. Brokers in central Virginia and Charlotte reported that there was an unusual level of demand for large blocks of industrial space. In addition, a Realtor from Raleigh reported an increase in industrial flex space. Overall, vacancies, sales prices, and rental rates flattened since our last report.
Agriculture and Natural Resources
Crop yields varied since our last report. Corn yields are above the 2012 record and on track for a strong finish this year. Cotton and peanut yields are steady in North Carolina, though below the 2012 record. South Carolina cotton declined moderately from the 2012 record, while peanut yields there were on par with year ago levels. In animal farming, a contact noted that poultry production was declining on the Eastern Shore of Virginia and Maryland due to regulatory changes and water pollution issues.
Natural gas production increased in the last four to six weeks, with a seasonal uptick in gas prices. According to a West Virginia contact, natural gas exploration continued to be active with new pipeline being added when needed. He also reported a proposal for a petrochemical complex in the near future. Coal production has decreased slightly. An industry contact stated that current production levels are expected to remain constant. There were reports of possible coal mine closures.
Labor Markets
Employment conditions around the district improved slightly over the last several weeks. According to the manufacturing survey, employment and wages rose somewhat more quickly. Survey results from the retail and service sectors indicated that employment picked up across the board. Wages in the service sector increased marginally while faster growth was reported in average retail wages. A respondent in North Carolina said that hotel operators in the western part of the state were raising wages by 6 to 7 percent for low-skilled workers.
A staffing agency executive remarked that it was difficult to find suitable candidates because the "skill level demanded is too high," and that more workers are taking temp-to-permanent positions. Additionally a recruiter in South Carolina stated that while temporary employment orders rose, full time job openings remained depressed. Contacts reported difficulty filling permanent positions in the fields of medical, maritime, construction-related, and information technology. A temp agency in Maryland reported that labor demand is currently targeted towards distribution, heavy manufacturing, and the information technology sector. Seasonal retail hiring has been generally at last year's level, and few contacts expected to retain seasonal hires as permanent employees after the holidays.