Beige Book Report: Richmond
March 5, 2014
Economic activity in the Fifth District increased modestly on balance, despite snow, ice, and unusually cold temperatures that caused many business closings. Manufacturing operations generally slowed as winter storms closed some plants, although a few firms reported an uptick in new orders. Retail sales increased modestly overall, even though many stores and auto dealerships closed during the snow storms. While some retailers benefitted from increased demand for cold-weather items, auto sales declined. Non-retail service providers reported flat revenues in recent weeks. In contrast, tourism and corporate travel picked up, and hoteliers reported strong bookings. Consumer borrowing slowed since the start of the year, while commercial lending remained strong, with several bankers reporting a healthy pipeline for business lending. Residential real estate strengthened, with Realtors reporting faster absorption in some submarkets. In addition, construction of single family homes has been slowly improving, while multi-family housing remained strong. Non-residential construction was generally soft. Commercial leasing ranged from no change to a slight increase since our last report. Agricultural activity slowed seasonally, while contacts were optimistic about a good year ahead. In the energy sector, natural gas production accelerated. In contrast, coal mining fell and some steam coal plants closed. District labor markets were mixed in recent weeks, as extreme weather affected production and services. However, demand was high for semi-skilled workers; also, more quality temp employees were being offered permanent work. According to our latest survey, employment declined at retail establishments and increased at non-retail services firms, while average wages rose across the service sector. Manufacturing employment slowed and average wages ticked up. Service sector prices advanced more quickly, while manufacturing prices increased at a slower pace.
Manufacturing
Manufacturing activity slowed in recent weeks, with winter storms affecting business operations throughout the District. There were a few weather-related plant closures since our last report, totaling between three and four days. In one instance, a North Carolina food manufacturer stated that recent storms caused his plant to close for a few days, resulting in lost wages, hours, and production. A few District plant managers said that the facility downtime would reduce shipments, and in February, survey respondents also indicated that shipments and new orders declined. However, some manufacturers reported that new orders have risen slightly and plants are working to catch up after a slow start in January. A metals manufacturer in South Carolina reported an increase in January sales, slight growth in export sales, and a stronger March forecast. Overall, contacts expected improvement in the spring. Prices of raw materials and finished goods rose at a slower pace, according to our survey.
Ports
Reports from port officials were mixed but indicated that activity increased overall. Auto imports remained robust, and container volume continued to be strong and growing year over year, particularly at the Port of Virginia. Exports of agricultural materials leveled off in Baltimore, while in Charleston, South Carolina, exports of containerized grains and soybeans were very strong. International coal exports declined slightly while coal shipments to domestic locations fell sharply. Dockworkers at the Port of Baltimore with unresolved labor contracts have remained on the job as mediators work toward a conclusion. Seasonal slowdowns related to the Chinese New Year are expected to last into mid-March.
Retail
District retailers reported modest revenue growth, restrained in part by the unusually cold temperatures and multiple winter storms that forced many stores and auto dealerships to close temporarily. An auto dealership in West Virginia reported getting 18 to 20 inches of snow, with only one customer on the lot the next day. Sales of weather-related goods were up for a chain hardware merchant in central Virginia, and the manager of a West Virginia sporting goods store said that the weather helped sales, despite declining foot traffic. Post-holiday discounting boosted sales at several stores in January following mediocre results in December. The manager of a discount department store in the Tidewater area of Virginia reported little change in recent weeks and noted that 2013 had ended with sales below the previous year. Looking ahead, a representative of central Virginia retailers stated that with Easter falling in late April, merchants have more time for promotions, especially for warm-weather apparel. Retail price growth accelerated moderately.
Services
Revenues at non-retail services firms remained flat since our last report. An executive at a national freight trucking firm reported that he still expects double-digit tonnage growth in the first quarter, despite closed roads and terminals as winter storms moved across the country. However, several other businesses reported no change in demand for their services, and an executive at a wealth management firm in central Virginia described business as "status quo," even with improved client optimism. An executive at a North Carolina healthcare system reported that flu cases were below typical seasonal levels. Services prices edged up at a slightly faster pace.
Tourism was booming at winter resorts, as natural snowfalls were abundant and colder temperatures allowed additional snowmaking. In several locations, mid-February bookings were solid because Valentine's Day and Presidents' Day sandwiched a weekend. However, an hotelier commented that this pushed bookings into one good weekend instead of two. A hotel manager in western North Carolina reported strong bookings and also noted a shift to more transient visits than conference or group bookings in recent weeks. In contrast, a contact in Baltimore saw increased corporate travel. On the Outer Banks of North Carolina, visitors now expect a package "experience" when renting a home, such as included linens, tickets to events, and restaurant coupons.
Finance
Since our last report, consumer borrowing slowed considerably while commercial lending remained strong. Several contacts indicated that residential mortgage lending had nearly come to a halt, in part because of this winter's extreme weather. However, a Virginia lender believed that the demand for new homes is there, but that people are "just trying to survive the weather right now." Mortgage refinancing activity also declined in most areas. Interest rates flattened recently, after a decline in January. Meanwhile, credit standards remained tight, according to two bankers.
According to sources, commercial lending picked up. Several bankers reported that loan volumes were robust and that they had a healthy pipeline for the future. One lender said that businesses were looking for shorter term commercial real estate loans in order to benefit from the lower interest rates that those loans offer.
Real Estate
Residential real estate strengthened since our last report. Several brokers reported a slight increase in home sales in recent weeks and generally higher sale prices. In addition, buyer traffic and pending sales rose in the past four to six weeks, although a few Realtors noted slowness due to winter weather conditions. A Northern Virginia Realtor commented that sales were more robust than expected, particularly in the high-end market. However, most brokers indicated steady improvement in the $200,000 to $500,000 price range. Realtors reported a mild decrease in housing inventory, with faster absorption in some submarkets.
Construction of multifamily housing remained strong since our last report. In addition, single-family residential construction is returning throughout the district, according to contacts, but has been "slow to come out of the ground" primarily due to weather conditions. Other than in Washington, D.C., non-residential construction was softer. Commercial leasing ranged from unchanged to slightly stronger, with inquiries mainly for small spaces. While most Realtors reported little change in concessions and incentives, some in Washington D.C. and Northern Virginia saw more concessions, in the form of tenant improvements. Reports on vacancy rates varied across location and submarket. Lease rates were unchanged and sale prices rose mildly. Realtors reported either no change or a slight increase in demand for Class A office space.
Agriculture and Natural Resources
According to agriculture contacts, crop prices declined in recent weeks. Falling feed costs and higher cattle prices led contacts to believe it will be a good year for livestock producers. Also, farmers expect an increase in poultry production. However, a North Carolina respondent was concerned about an increase in swine virus in his region. A Virginia nursery owner stated that recent cold weather damage, if any, will not be known for a month or two; even so, he expects a ten percent increase in year-over-year sales this spring. A North Carolina agri-business contact reported that tobacco and vegetable producers in his region were cautiously optimistic for the year ahead. In South Carolina, recent ice storms have caused timber damage that is still being assessed.
Natural gas production remained robust. A West Virginia executive reported "incredible" industry growth and noted that shale gas has fundamentally changed the industry outlook. Contacts remarked that energy prices had risen due to increased demand during the extremely cold weather, and a few businesses reduced usage as a result of the higher cost. An executive also noted that two nuclear power plants are expected to shut down because of high licensing costs. Coal mining continued to soften. Several observers have stated that while steam coal plants experienced closings, metallurgical coal is holding its own--but overall the coal industry is weak at best. In West Virginia, leaking chemicals from a coal processing plant were found in public drinking water, and in North Carolina coal ash was discovered leaking into a river.
Labor Markets
Reports on labor were mixed, as weather-related shutdowns slowed hiring slightly. Demand was strong for semi-skilled workers, project-based laborers, government and healthcare workers, and experienced administrative professionals. Increasingly, quality temporary workers were being offered permanent positions. Turnover remained high among low skill positions. According to our latest survey, retailers reduced employment and average retail wages declined slightly, while non-retail services providers moderately increased payrolls and average wages rose. Manufacturing employment slowed and average wages edged up.