Beige Book Report: Richmond
January 15, 2014
The District economy grew at a moderate pace in recent weeks. Manufacturing shipments and new orders had mostly solid increases, although there were also a few reports of weakness. Retail sales softened, with the exception of big-ticket items. Demand for non-retail services was little changed. Tourism generally flattened, with the exception of resorts specializing in winter activities. Borrowing by consumers slowed, except for new home construction and car loans. Commercial lending picked up, particularly for large projects. Residential real estate improved since our last report, with some areas reporting more residential construction. Commercial construction expanded for educational, medical, and some retail projects, and remained strong in multi-family. Commercial leasing reports varied across the District. Agricultural yields exceeded expectations, particularly for crops that were put at risk by excessive rains in this growing season. The energy sector remained stable, with minimal change in production since our last report. Hiring in the District continued to improve, despite lingering concerns about costs related to the Affordable Care Act and difficulty finding highly skilled workers. Average wages declined in the service sector while manufacturing wages increased moderately. Service sector prices rose at a faster pace, while manufacturing price growth slowed.
Manufacturing
Manufacturing grew moderately overall in recent weeks, although there were scattered reports of weakness. According to the latest manufacturing survey, shipments and new orders had solid growth. In addition, a West Virginia cabinet manufacturer remarked that steady growth in new construction boosted sales for his firm's higher-end cabinets. Further, an electrical components manufacturer in Virginia and a custom plastics executive in North Carolina reported stronger new orders. Food production executives in Virginia also reported a slight increase in demand for their products. In North Carolina, textile and composites manufacturers broke ground for new plants. On the other hand, a Maryland machine tool manufacturer stated that orders from builders and distributors were down. Also, a copper and aluminum materials producer in South Carolina noted a softening in sales, and a South Carolina food manufacturer reported a slight decline in shipments. Prices of raw materials and finished goods rose at a slower pace, according to our survey respondents.
Ports
Ports reported strong year-over-year traffic, even after eliminating effects of diversions to the Fifth District from northern ports as a result of last year's major hurricane. Paper, pulp, and agricultural exports were especially robust. Auto units were down slightly from a year ago, but remained strong. Exports of agricultural and construction machinery increased compared to earlier this fall, but declined mildly from a year ago. In contrast to softer demand in domestic markets, foreign coal shipments were up slightly year over year. On the import side, manufacturing supplies such as pipe and wire have risen significantly and port administrators expect that re-shoring of manufacturing will continue to build demand for such imports.
Retail
Retail sales growth generally slowed, with a few exceptions in recent weeks. A retail representative in central Virginia remarked that the pace of sales at small merchants in that area was "pretty depressing." In addition, a discount department store manager commented that holiday sales were slightly below last year's. Auto sales remained strong, ending the year slightly above year-ago levels, as manufacturers of both domestic and foreign cars offered incentives to move the 2013 inventory. A dealer commented that people have more confidence in the economy and are now willing to get that new car "they've been hankering for." He expected prices of used cars to decline as trade-ins continue to flood the market. In addition, sales of heavy trucks in West Virginia are being driven by increased natural gas production in that state. Furniture sales were strong, with an upscale furniture retailer reporting customer preference shifting to products produced in the U.S. and Canada. Pharmacy and apparel sales also rose. Survey responders indicated that average retail prices increased more quickly in recent weeks.
Services
Non-retail services contacts reported little change since our last report. An executive at a national trucking firm said demand had slowed in recent weeks, which would result in capacity tightening as some smaller firms shut down or idled trucks rather than renew vehicle registrations for 2014. An accounting firm in West Virginia reported generally flat demand for services, with the exception of an increase in audit work for non-profits due to federal grant requirements. Demand was generally soft at hospitals and other healthcare organizations, and administrators reported that they expect decreasing utilization along with declining Medicaid and Medicare reimbursement under the Affordable Care Act. One executive reported that the only change was an increase in flu and Norovirus cases in central North Carolina. Prices rose at a slightly faster pace at non-retail services firms.
The tourism industry had slow to flat bookings in recent weeks, outside of resorts specializing in winter activities. In Virginia, a resort manager remarked on the good skiing weather this season, having already sold several times the number of passes as last year at this time. Tourism was moderate on the outer banks of North Carolina, where the re-opening of the Hatteras Bridge reduced the need for ferrying tourist traffic. In Charleston, South Carolina, the restaurant industry is growing, but parking and congestion remain a problem. Rates were unchanged at most hotels.
Finance
Consumer borrowing generally weakened in recent weeks, while commercial lending strengthened. Reports across the District indicated low demand for mortgages on existing homes and refinance loans. In contrast, new construction lending improved. A South Carolina lender noted that loans for luxury autos were robust as consumers took advantage of low interest rates. According to a Virginia lender, mortgage interest rates rose recently, while consumer credit standards were unchanged. Another lender commented on the competitive atmosphere, and said he expects lenders to become more aggressive. Additionally, a Virginia bank executive reported that underwriting exceptions were more prevalent, especially in nonrecourse lending. In commercial lending, applications for large business expansion loans have increased. A North Carolina banker noted a pick-up in capital investments, particularly for construction projects. However a central Maryland banker reported that small business lending slowed.
Real Estate
Residential real estate grew moderately in the past four to six weeks. Brokers reported a mild increase in sale prices, steady buyer traffic, and a slight uptick in property sales. According to a central Virginia Realtor, cash sales increased and higher end houses were "selling fast." However, a few agents stated that prices remained flat, and reports on higher end home sales were mixed. On balance, the average days-on-market and inventory decreased. In addition, brokers reported a positive outlook for the spring market, noting higher inventory of better quality homes as well as fewer short sales and foreclosures. Overall, residential construction remains tepid. A few brokers stated that single family home construction is picking up, primarily where developers are completing previously started projects.
Commercial construction increased, with a contact reporting new projects underway for college campus housing and small medical centers in Maryland and the District of Columbia. Brokers also reported continued growth in grocery-anchored commercial construction. Multi-family housing remains active, while office building continues to be depressed. Commercial leasing was mixed since our last report. Most Realtors reported little change in demand for Class A office space, although a Virginia Beach broker reported relatively high vacancies. Demand for retail space in the Tidewater area of Virginia was mixed. A broker in the District of Columbia retail market reported that large blocks of space are in short supply. In North Carolina, a Realtor has received steady inquiries for industrial distribution space. Realtors indicated a slight increase in commercial sale prices, and little change in lease rates.
Agriculture and Natural Resources
Agricultural reports were generally positive in recent weeks. A few sod and seed companies reported a decline as a result of poor weather conditions. A vegetable farmer in North Carolina said that the excessive rain this season was less destructive than expected, and with increased demand, the year ended better than anticipated. Additionally, a Maryland fruit farmer reported excellent fruit yields due to the cold weather. Another Maryland contact remarked on this season's increase in corn sales, and added that corn was the leading export crop in his region this year. In animal farming, a West Virginia source noted strong growth in poultry processing. Reports regarding input and output prices were mixed.
Natural gas production edged up slightly. A West Virginia contact stated that the industry continued to grow in all facets of production. Growth in natural gas was also said to be helping other businesses in the region. Coal miners indicated little change in production since our last report, but said output was slightly down compared to a year ago. A contact commented that Central Appalachian coal producers were struggling with low coal prices, regulation, and a decrease in employment.
Labor Markets
Conditions continued to improve throughout the District in the last several weeks with numerous reports of strong labor demand. However, few of our contacts offered permanent positions to seasonal workers, and many employers remarked on the high turnover among low-skill workers. A staffing consultant in Maryland noted that "there is a greater sense of confidence going into 2014," and that the highest demand is for IT and engineering skills. Elsewhere in the District, a Virginia contact reported that skills related to healthcare were in high demand. According to our manufacturing survey, hiring expanded robustly while the service-sector survey reported marginal growth on the retail side and only small increases in the non-retail subsector. In addition, several sources continued to report difficulty finding qualified workers or having to pay a premium to get them. In fact, one manager suggested that qualified candidates seemed to be basing employment decisions on more than just salary, and were also considering factors such as the work environment. Employers continued to express concern about potential cost increases related to the Affordable Care Act. Average wages rose moderately at manufacturing establishments, but declined at services firms, according to our latest survey.