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Beige Book Report: Richmond
January 15, 2020
Summary of Economic Activity
Overall, the Fifth District economy grew moderately in recent weeks. Manufacturing activity, however, softened slightly as firms continued to face headwinds from tariffs, other trade policies, and labor availability. Port activity varied by commodity, while trucking shipments rose modestly, compared to recent months, but remained below last year's level. Travel and tourism grew moderately, with particular strength in business travel. In addition, retailers reported moderate growth in sales as holiday shopping was even with or above the year-ago level. Home sales and mortgage lending remained fairly strong, as were commercial real estate leasing and construction. Business lending, according to bankers, was modest, as some firms were reluctant to invest due to uncertainty. Nonfinancial services firms gave mixed reports with some education and health services firms reporting growth while firms providing professional and business services reported softer demand. Farmers generally had good crop yields and solid demand in recent weeks, but faced tighter margins. The demand for labor remained strong across skill levels, and wage increases were moderate. Price growth picked up slightly for services, but remained muted, overall.
Employment and Wages
The demand for labor remained strong in recent weeks and businesses continued to report labor shortages across skill levels. The tight labor market led some firms to increase benefits and wages, ease background screening requirements, and invest in labor-saving technology. To retain workers, firms have increased wages, training, and talent development. Overall, wage increases were moderate with some larger raises cited for specific job categories, such as electricians and other skilled trades.
On balance, price growth remained moderate since our previous Beige Book report. Manufacturers reported little change in annual growth of prices paid and prices received in recent weeks with both increasing at rates slightly below two percent, on average. Several manufacturers said that tariffs continued to impact the cost of raw materials. Meanwhile, services sector firms reported an uptick in price growth for prices paid and prices received, with both exceeding two percent but remaining within a moderate range.
Fifth District manufacturing softened somewhat since our last report. On balance, contacts reported drops in both shipments and new orders. Many manufacturers cited uncertainty regarding trade policies as a major concern. Several increased prices of final goods but struggled with low profit margins due to tariffs on raw materials. Some manufacturers saw strong demand but had output constrained by labor shortages. However, a Virginia food manufacturer met demand by and investing in new equipment.
Ports and Transportation
Import and export volumes varied by commodity in recent weeks. For example, port contacts noted a decline in soybean exports to Asia, but expected shipments to rise after an announced trade deal with China. Exports of metals and hardware to Europe were weak, but pork exports were strong. Imports of furniture and other commodities were soft, but auto and apparel imports remained strong. Despite continued concerns about trade policy, port executives were optimistic and continued to invest in capital expansion projects.
Fifth District trucking rates continued to soften, and while shipments were lower than last year, they were slightly above the previous few months. Retail shipments were fairly strong for the holiday season. Some trucking companies picked up both business and labor from a major company closure as well as from continued closures of smaller companies. Low fuel prices helped margins amid softening rates, but one executive is struggling with increasing costs of liability insurance. Trucking firms expressed concerns about political uncertainty going into an election year, but continued to make long-term investments and were optimistic that business would remain solid.
Retail, Travel, and Tourism
Overall, Fifth District travel and tourism grew moderately since our last report. Business travel was particularly strong. Hotel rates and occupancy generally remained solid around most of the District amid high demand, even as more rooms opened. One exception was a hotel in Greenville, South Carolina, that attributed a drop in occupancy to increased supply of both hotels and short-term rental properties. Additionally, hotels in Charleston, West Virginia, reported low occupancy despite stronger tourism in the state as a whole.
Retailers in the Fifth District reported moderate sales in recent weeks. Stores had solid customer traffic for the holidays, and many retailers reported that holiday sales were level with or up from last year. Auto dealers had increasing sales, amid high manufacturer incentives, and noted a shift towards smaller down payments and longer term financing. Some dealers said that rising costs were leading them to raise prices, and there were mild concerns about tariffs and online competition. However, other dealers have continued to invest and expand, as they expect to see strong growth in 2020.
Real Estate and Construction
Home sales in the Fifth District remained fairly strong in recent weeks, apart from a slight seasonal softening. Some real estate agents noted an increase in days on the market as home prices rose but said activity is strong overall. Inventory levels remained low, particularly in lower price ranges. Demand for construction of new homes was high, but construction was limited by availability of workers. Contacts expected buyer traffic and demand to increase in the coming months.
Commercial real estate leasing remained strong since our last report. Brokers reported strong demand for industrial and retail space but slightly lower demand for office leasing. Occupancy of multifamily properties increased. Rental rates were generally described as steady to increasing slightly across property types. Office vacancy rates were stable, although some brokers expect them to increase in the coming months. Commercial real estate sales and sale prices showed modest growth, boosted by low interest rates, and construction remained strong across most types of properties, even though construction costs are high.
Banking and Finance
Overall, loan demand grew slightly in recent weeks. Bankers said that moderate growth in residential mortgages and commercial real estate loans was due, at least in part, to low rates. Although some bankers noted that the number of C&I loans in the pipeline rose modestly, a few respondents stated that firms seem to be holding back on capital spending. On balance, residential refinancing activity, home equity lines, and other consumer loans grew modestly. Applicant credit quality and loan delinquencies were reportedly unchanged, but bankers reported a slight decline in underwriting standards. Core deposits remained unchanged despite comments about increased competition from non-bank financial institutions.
Reports from nonfinancial services firms were mixed. Universities reported growth in healthcare, IT, and computer science programs. Also, a health service provider experienced growth and investment in ambulatory and urgent care facilities. A marketing firm, on the other hand, reported a slowdown that was partly due to the holidays and partly because potential clients were taking a long time to make decisions. In addition, a couple of firms in D.C. noted that political uncertainties, including a potential government shutdown, hampered demand for IT consulting and teleservices.
Recent reports on the natural resources sector varied. Agriculture contacts were mostly positive because of good crop yields and solid demand; however, farmers faced tighter profit margins due to low selling prices and rising prices for labor, equipment, and land. Coal production reportedly picked up slightly, but several firms remain in bankruptcy proceedings. Finally, the oil and gas industry was negatively affected by low selling prices, excess supply, and stalled pipeline construction.
For more information about District economic conditions visit: www.richmondfed.org/research/regional_economy