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Beige Book Report: Richmond

April 19, 2017

Summary of Economic Activity
The Fifth District economy expanded at a slightly faster, albeit still modest, pace than during the previous Beige Book reporting period. Manufacturing activity increased amidst reports of stronger shipments and new orders, but tighter margins reportedly cut into capital spending plans. Port volumes remained very robust and increased modestly further despite some weather disruptions, while reports on other freight were mixed. Retail sales rose at a modest pace while tourism activity was boosted by the early arrival of warm weather. Realtors reported an increase in the number of new residential listings, but quick sales left inventories unchanged at lower-than-desired levels. Nonresidential leasing activity advanced modestly while commercial construction was mostly steady. Financial services activity strengthened modestly while nonfinancial services revenues rose slightly. Reports on natural resources were mixed. Labor demand remained firm and reports of modest wage increases broadened. Price increases were up modestly, on balance.

Employment and Wages
Labor demand strengthened moderately in recent weeks, and wage gains were more widespread. Contacts generally suggested that wage increases remained modest, although some firms noted sharper increases for high-skill workers who are in short supply. Employment agencies reported an increase in the number of employed workers seeking different jobs, higher turnover rates, and more wage pressures. A Virginia recruiter said that he was encouraging clients to increase pay rates and make quicker hiring decisions when they find the right worker. Persistent shortages of skilled construction workers adversely affected a larger number of builders, and led one South Carolinian to get out of the business after 25 years in it.

Recent reports indicated a modest rise in prices. Manufacturers' input prices increased moderately and slightly outpaced finished goods price growth, according to our most recent surveys. Specifically, prices rose for corrugated metal, plastic, and lumber. Meanwhile, services prices continued to edge up while retail prices grew robustly. House prices rose marginally on average; however, some contacts reported stronger price growth in areas with low inventories and a scarcity of buildable lots. Crop prices varied, with increases noted for peanuts and cotton while dairy and grain prices trended slightly lower. Energy prices were stable, on balance, with a slight decrease noted for Northern Appalachian coal.

Manufacturing activity increased as more firms reported higher new orders and shipments. Manufacturers of electrical equipment, semiconductors, computer products, autos, and fabricated steel noted stronger business conditions in recent weeks. Expectations for the next six months were positive, and small domestic manufacturers were particularly optimistic. Despite that optimism, contacts suggested that persistent labor shortages had pushed labor costs up beyond what could be recovered through price increases, with the resulting squeeze on margins leading to cutbacks in planned capital spending.

Ports and Transportation
Shipments through District ports were robust, on balance, and increased at a modest pace despite some disruptions resulting from adverse weather events. Moreover, one official suggested that the typical January/February slowdown did not occur this year as activity remained elevated after the peak holiday season. Strong import volumes persisted, and a few contacts noted that exports had picked up. One executive said that machinery exports increased recently following a considerable period of weakness.

Reports on truck transportation were mixed. One person, whose company delivers directly to end users, reported a slight acceleration in first quarter shipments from healthy fourth quarter levels. In contrast, a nationwide freight hauler described shipments as "ho-hum" and noted that recent improvements in manufacturing indicators were not yet translating into increased truck freight.

Retail, Travel, and Tourism
Retail sales continued to expand at a modest pace since the last report. Hardware and gardening stores saw brisker sales as homeowners took advantage of mild temperatures. A sporting goods store manager reported stagnant sales though he was optimistic about sales in the coming weeks. A furniture retailer said that customers are building, renovating, and moving again, which contributed to an increased pace of sales in the first quarter. A large auto dealer reported sales trending up in March for both new and used cars.

Tourist activity picked up beyond normal seasonal trends due to unusually warm weather. In the Outer Banks, spending on home furnishings and restaurants increased as vacation home owners returned to under-take remodeling projects. In western North Carolina, hotels saw strong corporate bookings and leisure activity at normal levels. Convention and tourist activity was at seasonal levels in the nation's capital.

Real Estate and Construction
Residential real estate sales increased moderately since the previous report. Realtors reported increased buyer traffic driven by the early spring weather. Inventories remained low; however most realtors contacted said that more homes came on the market, but those homes sold quickly resulting in unchanged inventory levels. Residential builders reported that home starts and closings were moderate and had increased somewhat.

On balance, commercial real estate leasing rose moderately. Industrial and retail leasing and sales activity remained very active throughout the District. Rental rates varied across sub-market and property types, although most contacts reported rent increases in the tighter retail and office markets. Brokers noted an increase in tenant improvement allowances, while free rent incentives diminished. Commercial construction generally remained steady at modest levels, and multifamily construction continued at moderate levels. A broker in Charlotte, North Carolina reported an increase in Class A office space with new construction hitting the market.

Banking and Finance
In general, financial services activity strengthened moderately in recent weeks. Residential mortgage demand picked up slightly in the District, with the majority of new activity coming from the purchase side as refinance lending demand softened somewhat. A South Carolina lender noted particular strength in mortgage demand coming from new homes. Commercial real estate loan demand generally strengthened, but varied throughout the District. Non-mortgage business lending rose marginally while auto lending remained fairly robust. Deposit growth was mostly stable, but one lender in West Virginia noted a slight decline. Interest rates were unchanged on balance; however, one lender said that pressure to raise loan rates was building. Credit quality was generally cited to be good and improving slightly. Similarly, credit standards remained constant even as competition among banks remained high.

Non-Financial Services
Our most recent survey suggested that services firms saw a slight increase in revenues. In general, services related to home building, remodeling, and landscaping reported the most robust activity. Accounting services firms also noted stronger demand as the income tax filing season was well underway. Meanwhile, a marketing firm indicated that increased business to new clients more than offset a slight decline in demand from some existing clients. A legal services contact in West Virginia said that business was picking up, particularly from clients in the construction, health care, manufacturing, and mining industries.

Agriculture and Natural Resources
Energy reports varied in recent weeks. Coal production was flat to marginally lower as prices were slightly down. At the same time, natural gas production rose slightly and the number of active rigs increased. Agriculture conditions were also mixed. Poultry and farming operations picked up in Virginia and West Virginia. In South Carolina, planting season was underway, having been somewhat delayed by cold weather. Also, a late winter freeze significantly damaged the state's peach crop. Investment in new farm equipment slowed slightly.