Beige Book Report: Richmond
July 18, 2018
Summary of Economic Activity
Since the previous Beige Book, the Fifth District economy has continued to expand at a moderate pace. Manufacturing activity remained strong although firms reported rising input prices and shipping delays. Trucking firms experienced robust growth and struggled to find drivers and keep up with demand. The volume of goods moving through District ports remained high. Travel and tourism were strong in recent weeks; however, some businesses were unable to provide services due to labor shortages. Retail and auto sales strengthened but firms continued to report concerns over increasing shipping delays and costs. Residential real estate activity increased modestly, and existing home sales continued to be restrained by low inventory levels. Commercial real estate improved modestly as demand picked up for industrial and restaurant leasing but slowed for retail space. Bank lending increased modestly, overall, especially for commercial loans. Nonfinancial services firms reported a moderate increase in demand. Hiring increased at a moderate rate as the job market remained tight. Price growth accelerated slightly but remained moderate, overall.
Employment and Wages
Labor demand strengthened moderately in recent weeks, and employment agencies reported growth in new job openings across all the industry segments they service. Employers continued to report tight labor markets, while candidates increasingly receive multiple jobs offers. Firms reported difficulty filling positions for mechanics, construction workers, engineers, commercial lenders, treasury and risk managers, accountants, IT personnel, hospitality workers, and skilled trade positions. While wage increases remained modest across sectors, reports suggested that wage pressures increased further.
Prices
Price growth accelerated slightly in recent weeks but remained moderate, overall. According to our most recent surveys, manufacturers' input prices increased sharply. In particular, prices for raw materials such as steel, aluminum, polyester, wool, acrylic, lumber, and caustic soda were on the rise. Manufacturers selling prices rose moderately, overall; however, several firms mentioned being unable to pass higher input costs through to consumers. On the whole, service sector firms indicated a moderate increase in prices paid that slightly outpaced growth of selling prices. Metallurgical and thermal coal prices picked up in recent weeks, as did crude oil prices.
Manufacturing
Manufacturing remained fairly strong. However, several manufacturers reported that while sales increased, profits dipped as price increases could not offset the rising costs of materials and transportation. Manufacturers also expressed concern about the potential adverse effects of rising trade tensions. For example, a District foam manufacturer reported growth in business but growing costs of raw materials resulting from tariffs. Additionally, a Maryland can manufacturer said he could not get the quality of steel needed domestically and anticipated losing business to foreign competitors who are not faced with steel tariffs.
Ports and Transportation
Port activity was strong and continued to grow in recent weeks. While export volumes fluctuated, imports continued to increase throughout the District, with ports seeing robust year-over-year growth. An executive from one port reported cutting back on volumes to allow for easier flow during the port's expansion. One port saw growth in auto exports as demand for used cars increased in oil-rich countries. In recent months, a District airport quadrupled the number of weekly flights to Europe to accommodate demand for cargo transportation. In addition, its domestic business continued to grow, owing largely to increasing e-commerce shipments.
Trucking firms continued to see strong growth and record-setting months. A Virginia freight hauler increased its fleet while other companies around the District said they would expand more if they could hire more drivers. Meanwhile, a North Carolina company built new distribution centers to increase capacity. As trucking firms again struggled to meet demand, they were able to increase rates. Demand remained strong for nearly every type of cargo, although a company in North Carolina reported particularly strong growth in retail goods.
Retail, Travel, and Tourism
Tourism remained robust in the District since our last report. National parks saw large increases in the number of visitors, and some restaurants experienced record business. Rental properties in North Carolina began to offer shorter stays in order to compete with other short-term rentals. Meanwhile, a few North Carolina hotels reported that occupancy rates remained high despite an unprecedented supply of rooms as more hotels opened. Several firms struggled to find employees; a Virginia resort was unable to open pools for the summer because of a lack of lifeguards, and a large hotel reservation center in South Carolina closed because of a labor shortage.
District retailers experienced strong sales in recent weeks. A Virginia auto dealer reported a noticeable uptick in business, and a North Carolina auto dealer attributed high sales growth to manufacturer incentives. A Maryland hardware store saw growing business, even as competition increased, and worked to improve its online presence with more sophisticated pricing technology. A West Virginia material handling equipment retailer reported that strong demand for goods was leading to shrinking inventory, a concern echoed by retailers around the District. Retailers also expressed concerns over trucking shortages, which are causing long lead times and higher shipping expenses.
Real Estate and Construction
Residential real estate firms indicated modest growth, overall. Home sales rose modestly in recent weeks, although low levels of inventory persisted and buyer traffic slowed. District agents said that new listings continued to sell quickly. Meanwhile, residential construction activity reportedly picked up in southern Maryland, and demand for new homes strengthened in the Carolinas. However, builders continued to report that new home production timelines were behind schedule as there were not enough workers and available lots to keep up with the increased demand.
Commercial real estate leasing and sales rose modestly in recent weeks. District brokers reported increased demand for industrial space and a pickup in restaurant leasing, while retail activity slowed slightly. New commercial office construction was soft, despite reports of some build-to-suit projects. Agents said that office and retail landlords were offering fewer incentives and concessions had tightened. Vacancy rates remained low across sub-markets, and a few brokers noted a lack of available product. Commercial rental rates were generally reportedly as stable to increasing modestly. Multifamily leasing remained healthy, overall.
Banking and Finance
On the whole, loan volumes increased modestly since our previous report. Residential mortgage demand grew at a modest pace; however, the low inventory of homes for sale continued to restrain mortgage loan growth. A banker in Virginia stated that business was particularly strong for new home construction and home equity lines to fund remodeling and refurbishing of existing homes. Commercial lending activity rose moderately in recent weeks. Loan growth was broadly based as bankers noted increased demand for agriculture, commercial, industrial, small business, commercial real estate development, and multifamily construction loans. Deposits rose moderately, on balance. Bankers said that competition for deposits had strengthened considerably and that interest rates moved higher. Credit quality remained strong while credit standards were generally unchanged.
Nonfinancial Services
Since our previous report, the demand for nonfinancial services increased moderately, on balance. Specifically, demand picked up for telecommunication, administrative and support, technology, education, health, and legal services. A law firm said that some of the new business was due to the implementation of the EU's General Data Protection Regulation law that went into effect in May. Meanwhile, a defense contractor reported strong growth in recent months and was optimistic about the near future based on the recently approved federal budget.
For more information about District economic conditions visit: www.richmondfed.org/research/regional_economy