Beige Book Report: Richmond
October 19, 2016
Fifth District economic activity rose modestly in recent weeks. Although the manufacturing sector remained soft, the pace of decline slowed. Revenue growth increased more broadly at services firms, and retail sales strengthened. Tourism remained steady at seasonal levels. Household and business loan demand increased slightly on balance. Residential real estate sales were up moderately and commercial activity rose modestly. Agricultural activity also picked up slightly. Natural resource extraction was little changed. Large-scale evacuations were underway along parts of the East Coast in recent days as hurricane Matthew approached.
Since the previous Beige Book, labor markets have tightened moderately. According to our surveys, upward wage pressures broadened considerably in the service sector but subsided slightly in the manufacturing industry. Employment rose in September, according to service sector firms, while employment fell at manufacturing firms. Also in the survey, average manufacturing input prices continued to edge up slightly overall, while average prices received by manufacturers were little changed. Retail prices rose at a steady, mild pace. Services prices continued to rise modestly. Farm input prices were unchanged, while prices received dropped for some commodities. Coal prices ticked up, while natural gas prices declined slightly.
Manufacturing
Manufacturers reported that activity declined since our previous Beige Book report, albeit more slowly. Shipments and new orders softened and backlogs were broadly weaker according to surveyed producers. However, a food producer reported that shipments and new orders were unchanged at a healthy level, and a packaging firm executive reported a slight increase in shipments and new orders. Additionally, his company's capital expenditures had increased. According to our most recent survey, average input prices continued to edge up slightly overall, while average prices received were generally unchanged.
Ports
Port traffic, particularly containers, continued to strengthen since the previous report. One port official noted that car exports have declined and farm and construction machinery imports weakened further. The bankruptcy of a South Korean shipping firm interrupted calls, as some ports refused to work the ships until fees could be paid and alternate locations could be found for empty containers to be stored.
Retail
Retail sales rose for a broader set of merchants. Several large grocers reported flat to higher sales. In addition, a large department store wholesaler and a large pharmacy indicated sales were up. Also, a central Virginia retail representative noted that Halloween spending is expected to be very strong, and retailers are hopeful that the spending growth will carry into Christmas. In contrast, home improvement merchants reported flat to lower sales, and a few car dealers said sales were unchanged or lower, contributing to a shortage of traded-in used cars. Retail prices rose about on par with the previous mild pace.
Services
Revenue growth expanded at services firms. Architects reported strong demand for their services as did an environmental and engineering firm. Demand for healthcare services remained robust, and an uptick is expected in the weeks ahead as the flu season begins. A transportation source reported that truck and railroad services experienced sluggishness due to excess capacity and the strong dollar. One transportation contact commented that a retail inventory overhang needs to be reduced before transportation demand would pick up. Services prices continued to rise modestly.
Tourism
Since the prior Beige Book, tourism remained steady and in line with last year's strong seasonal levels. A general manager at a resort hotel in central North Carolina said that business was stable although more people were waiting until the last minute to book. Hotels in Maryland and South Carolina reported solid early-autumn bookings. Thanksgiving holiday bookings were said to be good on the outer banks of North Carolina. Local events there have helped lengthen the tourist season, resulting in new year-round businesses opening this year. Room and rental rates were reported to be unchanged.
Finance
Loan demand increased slightly, on balance, since our previous report. Residential loan demand was mixed, with some reports of typical seasonal slowdowns. A South Carolina lender said that an increasing share of residential loan demand was coming from new construction. Refinance loan demand softened; a lender in West Virginia believed that demand declined because most people had already refinanced as a result of low interest rates. Business loan demand remained subdued, which some contacts attributed to uncertainty surrounding upcoming elections. Commercial real estate lending rose slightly, but varied by location. Multi-family construction demand picked up, according to a banker in South Carolina. A community banker in West Virginia saw a slight rise in demand for commercial real estate loans, which he attributed to larger banks rebalancing their portfolios. Several sources stated that regulations were reducing commercial lending. Competition among banks remained high and, in some cases, resulted in more aggressive loan structures.
Real Estate
Since our previous report, home sales rose moderately. With only a few exceptions, Realtors reported that increased sales and low inventories combined to push existing sales prices up and average days on the market down. The most active price ranges varied by location. For example, a Richmond, Virginia agent saw the most sales growth coming from homes priced between $150,000 and $325,000 while an agent in Washington, D.C. reported increased sales of homes priced $700,000 to $900,000 and over $1.25 million. Residential construction slowed somewhat, on balance, due in part to lot shortages. Reports on multi-family construction were mixed.
Commercial real estate activity rose modestly in recent weeks. Vacancy rates were generally lower for retail, industrial, and office space. Retail activity picked up, with much of the demand coming from large retailers, strip malls, grocers and grocery-anchored shopping centers, and fast casual restaurants. Demand for larger class A and mixed-use office spaces increased in Virginia Beach. A North Carolina agent said that class B and C properties were being absorbed. A Richmond contact reported increased office demand in the healthcare and energy sectors. Conversely, office leasing was reported as sluggish in Columbia, South Carolina. Industrial leasing activity rose moderately. A contact in South Carolina said investors were looking for new industrial property to buy; he also said rents were increasing. Retail and office rental rates were mostly unchanged.
Agriculture and Natural Resources
Agricultural activity picked up slightly. Weather conditions improved recently, which allowed farmers to begin harvesting corn and peanut crops. The dry summer, however, delayed the maturation of cotton crops, leading to some harvesting delays. According to a South Carolina farmer, the financial loss from last year's flood was suppressing capital investments this year. No changes to input prices were reported. Prices of beef, corn, and soybeans declined.
Natural gas extraction was unchanged in recent weeks, and coal production rose slightly, but remained below year-ago levels. Coal prices ticked up since our previous report, while natural gas prices edged lower.
Labor
Since the previous Beige Book, labor markets have tightened moderately. Employment rose in September, according to service sector firms, while manufacturing firms indicated a decline in employment. Employers continued to report difficulty finding workers across all skill levels. Specifically, construction workers, skilled tradespeople, farm hands, hospitality workers, engineers, managers, and doctors were in short supply. A contact in South Carolina said that construction was being constrained by labor shortages. A construction industry source in Virginia reported a tremendous increase in training programs. Similarly, an executive in Maryland noted increased investment in employees, such as sending them to a local community college to improve or gain skills. Wage pressures continued to increase slightly. A South Carolina contact attributed an increase in turnover in the trades to employees being lured to new jobs with higher wages. An executive in Maryland reported seeing more wage pressure in professional services and in manufacturing. According to our surveys, upward wage pressures broadened considerably in the service sector but subsided slightly in the manufacturing industry.