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Beige Book Report: Richmond
December 5, 2018
Summary of Economic Activity
The Fifth District economy expanded at a moderate rate, overall. Manufacturers gave mixed reports as some firms reported solid growth while others experienced lower demand and higher raw materials prices due to tariffs and some had lingering negative effects from the recent hurricanes. District ports saw robust activity, particularly for imports; however, officials were concerned that the threat of new tariffs boosted imports temporarily and volumes could drop off in the near future. Trucking demand slowed slightly but remained robust. Retail, travel, and tourism rose moderately as customer traffic and hotel bookings picked up in advance of the holiday season. Residential home sales increased modestly overall but varied considerably across markets. Real estate agents reported a decline in buyer traffic and a slight decline in prices for higher-priced homes. Commercial real estate leasing rose moderately for office, retail, and industrial markets. Lenders saw a modest increase in residential mortgage demand and stronger growth for commercial real estate loans. The demand for labor strengthened moderately, and wage increases remained modest across sectors. Price growth remained moderate, overall. However, input prices rose sharply and compressed firms' profit margins.
Employment and Wages
Labor demand continued to strengthen moderately in recent weeks. Employment agencies noted an increase in seasonal hiring and expected to post more job openings throughout the holiday season. One staffing agency reported strong demand for all positions and skill levels and stated that 'recruitment is the hardest it has ever been.' Staffing firms saw more companies offering permanent positions to temporary employees. Meanwhile, business owners had difficulty filling positions for IT professionals, accountants, technicians, construction workers, and front-line manufacturing workers. In addition, some firms said that the lack of qualified talent was becoming a constraint on their business. Wage increases remained modest across sectors.
Since our previous Beige Book report, price growth increased but remained moderate, overall. According to our most recent surveys, manufacturer's selling prices rose at a moderate rate while input prices rose sharply. Several firms commented that the strong dollar and tariffs continued to affect the availability and prices of raw materials. Service sector firms reported similar margin compression with moderate growth in prices received but a sharp increase in prices paid. Wholesale and retail services saw higher prices for goods affected by tariffs while businesses reported paying higher prices for business-to-business services and recruitment. Manufacturers and services firms saw higher shipping costs, as well.
Since our last report, Fifth District manufacturers gave mixed reports on demand. Tariffs were a significant concern noted by manufacturers, as they were believed to raise costs of raw materials, thereby raising prices and lowering demand. However, a cabinet manufacturer reported an uptick in business in recent weeks, as customers rushed orders in anticipation of higher tariffs in the new year. Meanwhile, a Virginia food manufacturer reported higher-than-anticipated growth that left the company struggling to meet demand. Many manufacturers continued to face high transportation costs. In addition, effects of Hurricanes Florence and Michael lingered, as production had been shut down in places.
Ports and Transportation
Fifth District ports saw robust business conditions. Export volume softened somewhat, but imports were strong across the District. One port handled record-breaking volumes in October. Port contacts stated that import growth was largely driven by retail, particularly auto. Some expressed concerns that the growth was the result of companies trying to order before another round of tariffs, which could lead to weak activity in the coming months. The softening in exports was partially attributed to agricultural goods, which were reduced by hurricane damage and tariffs. A District airport saw strong growth in imports and exports and was increasing capacity.
Demand for trucking remained strong, although firms noted a slight slowing of demand compared to the extraordinarily high levels seen in the last year. Trucking firms saw improvements in hiring that allowed them to keep their trucks moving but were hesitant to invest in new trucks and equipment because of concerns about demand in the next year.
Retail, Travel, and Tourism
Travel and tourism grew moderately since our last report. Hotel occupancy and room rates remained strong and bookings were picking up going into the holiday season. However, rainy weather suppressed tourism somewhat by preventing outdoor activities and made travel more difficult. Labor issues were reported by some businesses, such as a Virginia resort that had to cut back on scheduled ski lessons because of a lack of instructors while other businesses reported shrinking profit margins as a result of wage increases.
Fifth District retailers reported moderate growth, on balance, with strong demand and high customer traffic. A Virginia sporting goods store reported its best business in several years. Meanwhile, a North Carolina auto dealer reported steady business overall but noted a slowdown in new car sales as customers chose low-cost used cars instead. Several retailers reported narrowing profit margins as cost of goods increased as a result of tariffs, and transportation costs remained high. Some retailers in the Carolinas have not made up business lost because of the hurricanes. And a Virginia produce retailer reported losing crops to the storms.
Real Estate and Construction
Home sales increased modestly, overall, but the market was a little less consistent and buyer traffic slowed in recent weeks. Realtors attributed some of the slowdown to rising interest rates. Single-family home inventory remained low while average days on the market edged up in some locations. District home prices were reportedly stable to increasing modestly. Meanwhile, new home construction slowed slightly. A Virginia Realtor reported fewer new home sales at two residential developments and stated that the builder added incentives on existing inventory to help increase sales.
Commercial real estate leasing rose moderately in re-cent weeks as brokers reported strong demand across office, retail, and industrial markets. Vacancy rates remained low across markets, while rental rates were reportedly stable to increasing modestly. Commercial sales rose modestly, according to a few brokers, with industrial and retail building sites representing the majority of transactions. A broker in Charlotte, North Carolina, said that the number of office building sales had increased in recent weeks for both urban and suburban markets. Commercial construction increased modestly in some regions, which was mainly attributed to strong demand for warehouse and industrial space. Multifamily leasing remained healthy in most markets.
Banking and Finance
Since our previous Beige Book, loan demand grew modestly. Overall, bankers said that demand for commercial real estate loans strengthened, while business and auto loan demand was unchanged. Meanwhile, residential mortgage demand grew at a modest pace. Deposit rates increased, and bank executives reported that competition for deposits remained aggressive. Credit quality remained stable and credit standards were generally unchanged. Interest rates for residential and commercial loans rose slightly in recent weeks.
Demand for nonfinancial services was little changed in recent weeks. Professional and business services firms gave mixed reports; some said that demand increased while others commented that labor constraints were holding back growth. Enrollments at community colleges fell due to a strong labor market. Meanwhile, accounting and legal services firms experienced moderate growth.
For more information about District economic conditions visit: www.richmondfed.org/research/regional_economy