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Beige Book Report: Richmond

March 9, 1994

Overview
District economic activity expanded in January and early February. Manufacturing output increased, and the cold and snow boosted business at District ski resorts. Housing sales and commercial real estate activity strengthened, state tax collections increased, and loan demand rose somewhat. Retail activity and housing starts declined, in part because of unseasonably harsh winter weather. Housing prices were steady, but the costs of business inputs rose and commercial rents edged up. In agriculture, severe weather caused little damage to crops and livestock, but hay was in short supply.

Consumer Spending
District retailers reported that activity decreased in January. Revenues, employment, inventories, and shopper traffic declined, while wages and sales of big-ticket items were steady. Carolina respondents indicated that the mid-February ice storm barely affected their sales, but contacts in other District states reported reduced sales activity extending over several days. Looking ahead to the next six months, District retailers expected their sales to increase. They also expected retail prices to rise, but by less than the general rate of inflation.

Manufacturing
Despite unseasonably severe weather, manufacturers responding to our regular mail survey indicated that District factory activity grew moderately in January. Shipments, new orders, the average workweek, and order backlogs increased, and employment changed little. Finished goods prices were steady, and raw materials prices rose by less than inflation. One bakery owner, however, noted that prices for oil, flour, and sugar had risen dramatically. Another contact said that sheet steel producers had raised their prices. Most respondents expected shipments, the workweek, and prices to increase over the next six months, but they foresaw little change in employment.

Service-Producing Sector
Our survey of service-producing firms indicated that activity was steady in January. Revenues, employment, and wages generally changed little from December. Firms in North Carolina, however, reported increased revenues, while those in West Virginia said revenues declined. Respondents expressed more optimism about their business prospects than they had previously, and they expected prices to increase only modestly during the next six months.

Ports
Representatives at the District ports of Baltimore, Charleston, and Hampton Roads (Norfolk) indicated that exports were unchanged while imports were higher in January than in December and a year ago. Fewer vessels called at the Port of Baltimore, but they more than made up for their decline in number by carrying larger loads. Baltimore and Charleston expected export growth to outpace import growth during the next six months, but Hampton Roads expected both to grow at about the same pace.

Tourism
Activity at District hotels, motels, and resorts was higher in February than in December and a year ago, according to our contacts. Ski resorts in North Carolina, Virginia, and West Virginia reported unusually good activity as did respondents at beach locations. Most contacts expected tourist activity to continue to improve during the next six months. Advance bookings at some coastal areas in the Carolinas were at record levels.

Finance
Credit conditions improved during the last six weeks, according to District financial institutions. Some bankers noted that commercial loan demand was up and that loan activity had shifted from business refinancings to business expansions. Interest rates on commercial loans rose. Consumer loan demand and interest rates were steady. Several respondents noted that unusually harsh winter weather had had little impact on consumer loan activity.

Mortgage activity was steady, as a rise in originations offset a slight fall in refinancings. Rates on residential mortgages rose, which most respondents attributed to the recent tightening by the Federal Reserve. Loan officers had a positive outlook for all categories of lending activity in the near term but suggested that mortgage refinancing activity might taper off further if rates continued to rise.

Residential and Commercial Real Estate
District real estate activity strengthened in January and early February. Our contacts attributed stronger residential sales to continued consumer optimism about the economy and to a perception that mortgage rates had bottomed out. Recent harsh weather apparently did not dampen sales much but did reduce housing starts. Home prices were little changed during the period, but most homebuilders again reported increases in the costs of lumber and other building materials.

Commercial real estate conditions continued to improve. Lower vacancy rates in the retail sector were widely reported, and vacancy rates in Charlotte fell to a six-year low. Retail construction was underway in many areas, much of it being built by its discount chain occupants. Similarly, activity in the office and industrial sectors strengthened. Contacts expected a pickup in office leasing activity in the Washington area because a freeze on federal government leasing recently ended. Respondents reported speculative office building construction outside of Raleigh and in the Washington suburbs and noted construction of buildings to be occupied by owners in several other areas. Office rents were higher as a result of reduced landlord concessions and, in some instances, direct rent increases.

State Revenues
State revenue forecasters reported healthy tax revenue growth in most jurisdictions. Growth was slower in Maryland than in other states but remained on an upward trend. Contacts reported a turnaround in the District of Columbia where one individual said of the local economy, "It's not healthy, but perhaps the fever is breaking." Most states reported strong January sales tax collections, although Maryland's fell short of estimates.

Agriculture
The agricultural sector suffered only slightly from the severe winter weather. Small grains were in fair to good condition in most areas, with few reports of freeze damage. Winter calving and lambing activity and survival rates were normal. Several livestock producers, however, reported ice-related injuries to cattle and sheep. The bad weather increased hay usage and short hay stocks were widely reported. In some instances, livestock producers were culling herds as a result.