April 15, 2015
Outside of manufacturing, the Fifth District economy grew at a moderately faster pace in the weeks since the previous Beige Book. In manufacturing, shipments and new orders fell as winter weather forced shutdowns. Retail sales rose at a slower pace. However, revenue growth increased moderately at non-retail services firms, along with stronger tourism activity. Loan demand grew modestly. Residential and commercial real estate markets also continued to strengthen. Agricultural contacts reported seasonal increases in activity. Labor markets generally improved.
According to the most recent surveys, manufacturing and service sector employment rose at a slightly faster pace since the previous Beige Book report. Average wages in the manufacturing sector continued to rise at a tepid pace, and in the service sector, wage growth moderated somewhat. Manufacturing prices paid and prices received rose slightly faster. Retail prices increased more quickly and price increases in the non-retail service sector remained mild. Energy prices softened.
Manufacturing
District manufacturing contracted since the previous report. Shipments and new orders fell, while inventories of finished goods and raw materials rose somewhat faster in recent weeks. Several manufacturers attributed the decline in activity to adverse weather. A food manufacturer in North Carolina reported plant shutdowns and a textile manufacturer scaled back production due to a shortage of electric power during the cold weather. In contrast, a specialty producer of heavy construction products reported steady shipments despite a "rough winter." A few manufacturers noted delays in receiving components coming through the West Coast ports as a result of dockworker issues. Prices paid and prices received rose slightly faster than in the prior report.
Ports
District port officials reported stronger volumes in the weeks since our last report. One port had to briefly close to intermodal traffic during a winter storm. Diversions from the West Coast added to volume, such as a sharp rise in imports of retail products destined for the Ohio valley and grain exports from the Midwest. New contracts for West Coast dockworkers are expected to lead to reduced congestion at District ports. Coal exports continued to decline, while auto exports and imports remained strong.
Retail
Retail sales rose at a slower pace since our previous report. Sales were down, according to various merchants, including an appliance store executive, a hobby shop manager, and a gas station owner. However, retailers of construction materials and home and garden suppliers reported strong revenue growth. The manager at a discount department store said sales were meeting planned levels. Sales of cars and light trucks were "pretty good," according to a dealer in the Washington beltway area. Retail prices rose somewhat faster since the prior report. A large food supplier remarked that beef prices rose to an elevated level, while pork and poultry prices fell to very low levels.
Services
Services firms reported moderate revenue growth since the previous report. Sales were especially strong for accounting services, telecommunications, and cybersecurity firms. An executive at a healthcare organization said demand for services has been very high for several months, with no sign of abating. A financial services executive reported that clients are feeling better about the economy and have increased the risk levels in their portfolios. A contact at national trucking firm located in the District indicated little change in business activity, but expected stronger conditions in the second quarter. Prices at services firms rose at nearly the same rate as in our previous report.
Contacts in the tourism industry reported stronger group bookings in recent weeks. A large increase in group bookings more than offset a decline in the leisure category, according to a Virginia hotel manager, and capital spending rose at the resort. An executive at a North Carolina hotel reported that convention and group business increased year-over-year and he expected strong summer bookings despite new competition in his region. A South Carolina hotelier also reported a significant year-over-year increase in occupancy and a North Carolina hotel manager reported strong revenue growth supported in good measure by military and corporate bookings. In western Virginia, a resort hotel manager said this winter's revenues were above the record-setting revenues of a year ago, in part due to extended cold weather. As a result, the resort has been able to start new capital projects. A tourism executive on the outer banks of North Carolina said weekends have been strong since our previous report, with big events and good weather helping to draw tourists. In addition, construction of large rental properties has recently increased in that location. Room rates and rental rates were mostly unchanged, according to our contacts.
Finance
Loan demand rose modestly since our previous Beige Book. Residential mortgage demand increased in Maryland, South Carolina, and Virginia. Growth in residential mortgage lending in Maryland and Virginia was largely attributed to increased refinancing activity. In North Carolina, loan demand was reported to be soft; however, a lender in Charlotte expected a robust spring buying season due to pent-up demand. Commercial lending also picked up in Maryland, South Carolina, and Virginia. A banker in Maryland noted an increase in requests to finance the purchases of commercial properties by the current tenants of those properties. Also, a North Carolina CFO said that most new speculative building was being funded with private equity rather than with bank loans. Competition among banks remained high throughout the District. A lender in High Point, North Carolina said that larger banks have started to compete more directly against local community banks for real estate loans. Contacts throughout the District noted some loosening of credit standards and a lender in Maryland expressed concern that credit quality was declining as a result.
Real Estate
Activity in residential real estate continued to increase modestly since our prior Beige Book. Sales increased in Washington, D.C., North Carolina, and South Carolina. A Realtor in D.C. noted a slight increase overall, with a significant rise in the number of sales of high-end homes. Additionally, several contacts throughout the District expressed optimism about housing conditions normalizing and pent-up demand being released in the spring. A Richmond contact remarked that the real estate market seems a little tighter in the mid-range market, while a lot of inventory exists on the high end. On the other hand, a Baltimore-area Realtor commented that he had "not seen any movement in the past 30 days." Also, a Maryland executive said that demand softened for new construction homes. Average days on the market varied. For instance, the number of days rose in Washington, D.C. but fell in North Carolina. Inventories decreased in the Carolinas and were unchanged in D.C. but remained at historically low levels. Lot sales increased in North Carolina, along with speculative home building projects. An executive in South Carolina said lot prices increased and might hinder transactions.
Commercial real estate activity increased moderately since our previous Beige Book. Retail leasing rose in Virginia, primarily driven by demand for restaurant space, value fashion stores, and food stores. A Maryland contact reported that retail space in grocery-anchored locations has commanded higher rents. Demand in the District has picked up for health care space, executive offices, and residential real estate offices. In Maryland, stronger demand was largely driven by government contractors. According to a Realtor in Virginia, vacancy rates for retail space declined while office vacancy rates increased slightly as tenants formerly in large spaces moved to smaller spaces. Another Virginia Realtor said that limited new commercial space had come online, keeping vacancies stable to slightly lower. In North Carolina, vacancy rates decreased for retail, office, and industrial spaces. Throughout the District, there was new construction of multi-family residential buildings, hotels, and medical centers. A South Carolina contact cited concerns of some overheating in 1-4 unit multi-family development. A Virginia Realtor said that new apartment supply continues to be absorbed, with new projects continuing in Norfolk and Richmond.
Agriculture and Natural Resources
Since our previous Beige Book, agriculture contacts in the District reported seasonal increases in activity, although adverse weather was causing some disruptions. Orders increased for sod, trees, and shrubs; however, wet weather delayed harvesting to fulfill those orders. A farmer in South Carolina said that the ground was too wet to plant anything right now, potentially reducing crop yields in the fall. Crop prices were unchanged for sod, trees, and shrubs, and prices remained low for corn, cotton, wheat, soybeans, and peanuts.
Coal production increased slightly since our previous report, largely due to the effects of harsh winter weather on coal demand; however, production was lower than in the same period last year. Coal prices were unchanged since our last Beige Book. Production of natural gas decreased slightly in response to prices, which remained historically low, except for a brief spike in prices due to the cold weather.
Labor Markets
The demand for labor generally increased since our previous Beige Book. Positions were recently added in banking, manufacturing, engineering, health services, IT, transportation, and agriculture. Demand picked up for skilled manufacturing workers, managers and supervisors, and high-level IT and biotechnology professionals. Increased turnover was also widely reported in the District. A Maryland executive and two large companies in North Carolina reported increased turnover due to employee willingness to look for other opportunities. Difficulties finding employees were reported in banking, trucking, and biotech. Conversely, large manufacturers in North Carolina said they were having fewer problems finding workers due to partnerships with local universities and trade schools. Recently, upward wage pressures broadened slightly according to several District contacts, including for IT workers, accountants, and bankers. However, a northern Virginia executive said that downward wage pressures persisted in the defense and aerospace industries. According to our most recent surveys, manufacturing employment grew marginally and average wages increased modestly. In the service sector, hiring rose slightly while wage growth moderated.