Beige Book Report: Richmond
January 17, 2018
Summary of Economic Activity
Since our previous report, the Fifth District economy expanded at a moderate pace. Manufacturing activity picked up modestly, overall. Trucking firms continued to report robust growth compared to the prior period, while district ports experienced a mild seasonal slowdown, but strong year-over-year increases. Retailers saw a moderate increase in sales, with many stores citing better than expected holiday shopping this year. Tourist activity was strong in recent weeks, particularly at ski resorts. Home prices generally rose. Meanwhile, commercial real estate activity increased moderately. According to lenders, residential loan demand was flat while commercial loan demand rose moderately. Nonfinancial services firms reported moderate revenue growth. Labor demand increased modestly and firms had difficulties finding workers across a broad range of occupations. Wage pressures broadened moderately and many employers planned to raise starting wages. On balance, prices increased at a modest pace.
Employment and Wages
On balance, the demand for labor increased modestly in recent weeks, but several firms indicated that hiring was constrained by the tight labor market. Some of the most hard-to-fill positions were restaurant workers and chefs, construction workers and managers, nurses, retail workers, administrative assistants, software engineers, electricians, and truck drivers. A trucking company said that the labor shortage left many trucks sitting idle and was putting upward pressure on driver wages. In general, wage pressures broadened moderately as more businesses reported increasing starting wages. Many also planned to raise wages for existing employees, particularly for high performers.
Prices
Prices grew at a modest pace overall, since our previous report. According to our latest surveys, prices paid for manufacturing inputs slightly outpaced a modest rise in selling prices. Manufacturers of textiles, paper, wood products, chemicals, and plastics saw the largest increases in input goods prices. Food manufacturers, on the other hand, reported some of the smallest input price increases. In the service sector, price growth continued at a modest pace. Manufacturers and service sector firms expected prices to grow at a slightly faster pace over the next six months. Natural gas prices increased modestly, in recent weeks, while steam coal prices inched up and metallurgical prices rose modestly.
Manufacturing
District manufacturing activity increased at a modest pace, overall. A West Virginia rubber manufacturer said that sales picked up in recent weeks after a somewhat weak year, and they were optimistic that growth would continue in the coming months. Packaging and metal manufacturers reported moderate growth while a Virginia food company noted a slight uptick in sales. In contrast, a North Carolina machinery manufacturer reported one of the worst months on record, and a South Carolina paper product manufacturer reported a continued decline in business. According to our survey, vendor lead times increased on average, and many firms reported longer delivery times despite higher delivery costs.
Ports and Transportation
District ports reported robust year-over-year growth in shipping volumes despite a slight seasonal slowdown in recent weeks. Ports continued to handle more imports than exports, but some expected the gap to narrow in coming months. A Maryland port reported increased exports to the Middle East, coinciding with the rise of oil prices. Trucking companies continued to see robust growth in the past several weeks, which was especially noteworthy since they usually see a seasonal downturn at the end of the year. Some firms were unable to meet rising demand, as they were constrained by lack of truck drivers. Trucking companies expressed concerns that the newly mandated use of electronic logs could lead to an even greater shortage of drivers and lead to more mergers and acquisitions in the trucking industry.
Retail, Travel, and Tourism
District retailers generally reported moderate sales growth since our previous report, with many stores experiencing better-than-expected holiday sales. A Virginia hardware store had robust sales growth, particularly for power equipment and high-end grills. Meanwhile, a furniture store reported strong growth and a slight increase in its profit margin. A high-end women's clothing store noted slightly weaker sales, attributing much of the softening to online competition. A North Carolina auto dealer saw a surge in sales and a Virginia auto dealer reported a rise in sales of parts.
Fifth District tourism remained strong in recent weeks. A West Virginia ski resort was booked to capacity through the holidays and is on track for a record breaking season. Demand for hotel rooms rose across the District, although some North Carolina hotels reported slowing business and pressure to lower rates due to competition from newly built hotels and by-owner rental units. Hotels in D.C. and Virginia noted typical seasonal declines in rates and occupancy.
Real Estate and Construction
Residential real estate markets improved modestly in the past few weeks. Most contacts noted a seasonal slowdown, although one broker reported "unusually strong traffic for December." Sales prices were generally up and inventories were down. In fact, there were numerous reports of low inventories inhibiting activity, particularly at the more affordable price points. Real estate professionals generally indicated that the higher the price level, the broader the availability of homes for sale. In some markets, construction continued at a moderate pace--including in multifamily--while others reported very limited new home construction.
On the whole, commercial real estate activity picked up moderately in recent weeks, with low vacancy rates, strong absorption rates, and rising rents, despite the usual seasonal slowdown in leasing. However, there were some reports of softening activity particularly in office and in retail. A broker from Baltimore expects more retail store closures in 2018. In contrast, a broker in South Carolina said that retail construction was very active but office rents were flattening due to minimal white collar job creation in his market. He noted, however, that industrial leasing and construction activity was strong, and that speculative building was occurring for the first time since 2008. He also stated that multifamily construction, while slowing, was still active. Finally, a contact from D.C. reported that the skilled-labor shortage in construction has been the root of rising costs for a while, but the shortage recently started to manifest itself in deteriorating work quality and project delays.
Banking and Finance
Loan demand grew modestly in recent weeks as gains in commercial lending drove the overall increase. Residential mortgage lending was generally reported as flat to down slightly compared to about a month ago, but up from a year earlier. Deposits rose moderately, on balance, in recent weeks. On the commercial side, demand picked up moderately. In South Carolina, industrial lending was the most active. In West Virginia, the demand for coal and natural gas operating and expansion loans were increasing. Credit quality remained high throughout the District. However, credit standards loosened slightly as competition for loans led to more concessions on lending terms. Interest rates increased slightly, overall.
Non-Financial Services
Nonfinancial services firms continued to report moderate growth in revenues. The most upbeat reports came from professional and business services, administrative and support services, and legal services. A law firm in West Virginia said they had the best quarter since the recession. An administrative support firm said that clients were willing to pay higher fees for temporary staff, which was helping to boost their profits. Utility companies continued to report rising demand as temperatures declined.
Agriculture and Natural Resources
Coal production was little changed in recent weeks but was up considerably compared to the same time last year. Exports of coal, particularly to China, were responsible for much of the growth. Meanwhile, natural gas drilling and pipeline development work picked up moderately. A hardwood producer reported a modest rise in export demand.
For more information about District economic conditions visit: www.richmondfed.org/research/regional_economy