Beige Book Report: Richmond
October 16, 2013
District economic conditions improved modestly, on balance, since our last report. Manufacturing shipments and new orders softened, with only a few producers reporting strength. Retail revenues were flat to modestly higher, and auto sales improved year over year, although a few dealers reported recent flattening. Conditions were mixed at non-retail services firms, with some slowing in tourism. Lending activity increased slightly, and competition for quality loans was intense. Residential real estate sales improved, except for higher end homes, and there were some reports of new home construction. Commercial leasing varied by location and new construction was limited, except for multi-family housing. While excessive summer rain may reduce some crops, peanut yields were bountiful. Natural gas production rose and expansion was expected to continue; in contrast, coal mining declined further. Labor markets grew slowly, despite difficulty finding skilled workers. Average wages rose at a faster pace across the board. Prices grew more quickly in the service sector and at manufacturing firms.
Manufacturing
Manufacturing generally weakened since our last report. Shipments dropped for most products, and manufacturers said that both military and civilian orders were down. Although manufacturers of metals, pulp, paper, and chemicals indicated an increase in shipments in recent weeks, their new orders softened. However, a machinery manufacturer expected orders to increase because conditions were improving and distributors had kept inventories lean. A manufacturer of milled wood products reported that he currently has sufficient supply, but many lumber harvesting companies have gone out of business, which could lead to shortages when demand picks up. Auto parts manufacturing remained strong, and an aircraft executive remarked that orders for civilian planes were up. According to our latest manufacturing survey, the pace of price increases picked up for raw materials and finished goods.
Ports
Port activity remained strong in recent weeks. Port officials expect that even after the seasonal increase winds down, import levels will remain above last year. Food and beverage imports increased, while exports of automotive parts were particularly strong. Forest product exports also increased, as Chinese import constraints were partially lifted. The volume of containerized grain exports was robust in recent weeks. Heavy equipment imports and exports slowed as some U.S. coal mines closed and Chinese purchases slowed. However a port contact cautioned that comparisons to a year ago appeared weaker than usual because of last year's substantial replenishment of some equipment.
Retail
Merchants reported flat to modestly improved sales revenues in recent weeks. An executive with a chain of hardware stores remarked that sales were flat since our last report, although year-over-year same-store sales had increased. Home and garden retailers, as well as suppliers of building materials reported stronger sales, and a manager at a sporting goods store commented that his revenues were up despite rising freight costs. Auto sales were strong at a dealership near the Washington, D.C. beltway, although other dealers in Maryland and Virginia indicated sales were flat. Many smaller retailers have limited weekly hours per employee to control healthcare costs. As a result, some employees are taking second jobs, and a few firms are even partnering to help their employees "stitch together" full time hours by working for both businesses. Average retail prices rose more quickly in recent weeks.
Services
Revenues at non-retail services firms were mixed since our last report. Demand for trucking services softened slightly in recent weeks, according to a national freight carrier. Another contact reported that loads have become heavier and there is a shift to rail transportation. Healthcare systems executives reported little change in demand, while cost reduction has continued. An executive at a West Virginia bookkeeping firm said his business was steady, while a Maryland firm that provides medical records systems said that revenues picked up. In addition, large construction companies in Maryland and Washington, D.C. reported an increase in revenues. Services price increases quickened.
Tourist bookings slowed from recent strong growth. Although the federal government shutdown closed some tourist attractions, those closures did not result in guest cancellations, according to several hotel contacts. Bookings were flat for a hotel on the Maryland side of the Chesapeake Bay, and a central North Carolina hotel reported unusually slow bookings. A hotel manager in the Tidewater, Virginia area reported that summer finished on a strong note, but the autumn market of government and association bookings was below normal. A tourism contact on the outer banks of North Carolina told us that hotel bookings and rentals were stable, with family stays during Thanksgiving becoming increasingly popular. A resort manager in western Virginia has already received a few early season ski reservations. An hotelier in the North Carolina Piedmont expected a strong October for leaf viewing and a sold-out holiday season.
Finance
Consumer lending increased slightly. New residential mortgage lending increased according to a lender in West Virginia, who said that more people were taking long-term fixed rate mortgages rather than one to five year ARM's. He added that he has a decent pipeline for several months ahead and rates were stable. A North Carolina lender reported that loan demand was stable although pricing, especially for jumbo loans, was very competitive. He commented that some lenders were willing to sacrifice a good bit of margin to get those loans and another banker described the environment as "pretty brutal." In contrast, a lender in Virginia noted much slower demand for loans and mortgages. A Northern Virginia banker commented, "Banks are chasing the good deals," and therefore, spreads remained low. Inside the Washington beltway, demand for commercial real estate lending was strong, particularly for hotels and apartment buildings. A central Virginia banker also reported that lending for multi-family housing and commercial refinancing remained solid. A lender in North Carolina said while real estate loans slowed, demand for other commercial loans rose modestly, particularly in metro areas. Competition for commercial and industrial lending was strong. Lenders generally reported no changes in standards and credit quality.
Real Estate
Residential real estate markets improved, although new construction was limited. Residential sales increased according to a Realtor in the Washington, D.C. area. He noted that days on the market remained low despite reduced foot traffic, and sales in most price ranges improved, with the exception of homes over $1.5 million. A central North Carolina Realtor reported that sales and prices rose, while inventory on the market declined to slightly over five months. Houses in the more affordable range were moving, while the higher-end market was slow. Another Realtor commented that the mortgage process could take four and a half months for even the best applicants. A Maryland contact noted that new restrictions were making the mortgage process more challenging. He reported fewer days on the market and a marked increase in sales of entry level homes, while inventory remained steady. According to a report from the Tidewater area of Virginia, residential real estate sales were strong. A contact in South Carolina told us sales were up, mostly for price levels below $250,000. He also stated that condo sales rose slightly, but foreclosures and short sales in that area continued to depress prices.
Commercial development of multi-family housing has remained strong. A central Virginia Realtor reported that there is virtually no new speculative commercial building, and medical construction is either build to suit or with sixty to eighty percent of tenants. In contrast, smaller scale, single family residential development there picked up, and construction and renovation of apartment buildings was strong. He added that leasing activity was "reasonable" for smaller tenants; rents firmed and there were fewer incentives. Commercial leasing slowed in the D.C. area, according to a contact who told us people are "punting a little" before making decisions on five to ten year leases and construction. A central North Carolina real estate broker reported that retail leasing had improved slightly. Another Realtor in that state said last year's incentives were burning off, and leasing activity was steady. He commented that vacant office space was sufficient except for very large blocks, while industrial warehouse construction was picking up despite rising construction costs. In West Virginia, a Realtor noted that increased calls and site visits did not necessarily translate into a new purchase agreement.
Agriculture and Natural Resources
Fruit and peanut yields have been excellent, while cucumber production was reduced this autumn as a result of too much rain. Cotton and soybean harvests are also expected to be low this year because of the excessive rain this summer.
Natural gas production rose since our last report. A contact noted that some wells on the perimeter of production areas in West Virginia have produced more than expected, leading to speculation that the ultimate production area may be larger than originally defined. As always, further expansion will depend on prices, which declined in recent weeks. More pipeline was added, while the rig count remained static. Coal production in the District declined, with the year-to-date percentage drop in Maryland and Virginia both in double digits. West Virginia coal production also fell, although the drop was not as steep.
Labor Markets
Labor markets continued their slow expansion in most areas of the District since our last report. Our most recent survey results indicated that employment in manufacturing and in the non-retail service sector grew modestly. Employers across the District reported rising turnover and challenges finding qualified workers in biotech, health care, information technology, engineering, and advanced manufacturing. Demand for low- or semi-skilled workers included truckers, retail associates, warehouse employees, machine operators, and collections agents. Many contacts also commented on reluctance to expand due to uncertainty surrounding the Affordable Care Act; some employers cut hours or employees. Remarks on effects of sequestration were mixed. Average wages in the manufacturing and service sectors increased more quickly in recent weeks.