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Beige Book Report: Richmond

March 7, 2018

Summary of Economic Activity
The Fifth District economy expanded at a moderate pace since our previous report. Manufacturing activity increased moderately but firms faced longer vendor lead times due, in part, to trucking delays. Trucking firms concurred, saying that driver shortages kept them from meeting the high demand. District ports saw moderate growth, overall, as export activity picked up and, at some ports, came more in line with imports. Retailers experienced a slight slowdown in recent weeks. Tourism and travel remained robust despite a few disruptions from wintry weather. Reports on commercial real estate conditions were mostly positive but varied by region. Likewise, lenders across the Fifth District gave somewhat mixed reports on commercial loan demand. Nonfinancial services firms generally experienced a moderate rise in demand and revenues, although there were some reports of profit margin compression. The demand for labor increased moderately and many employers had challenges finding workers. Wage pressures broadened, and more firms were raising starting wages and offering expanded benefits to attract new hires. Prices continued to grow at a modest pace, overall.

Employment and Wages
The demand for labor rose moderately in recent weeks. A staffing agent reported a modest increase in orders as the lack of available workers to fill permanent positions drove more employers to staffing firms for temporary help, particularly in manufacturing, warehousing, and distribution. Contacts also reported difficulty filling positions for IT professionals, engineers, accountants, health care providers, and construction workers. Some employers said they were willing to train underqualified workers but had trouble finding workers with soft skills and a strong work ethic. Upward wage pressures continued to broaden moderately. In addition to raising starting wages, there were some reports of employers looking to attract workers with expanded benefit packages and more flexible work schedules.

Prices
Since our previous report, prices grew at a modest pace. According to our most recent surveys, manufacturers reported moderate increases in input costs, which outpaced growth in selling prices. Some of the largest raw materials price increases were reported for lumber, plastics, metals, and packaging materials. A food manufacturer saw prices rise for flour and sugar but decline slightly for poultry, eggs, and beef. Service sector prices grew modestly, overall. Export prices rose slightly for metallurgical coal but declined somewhat for thermal coal. Meanwhile, natural gas prices declined modestly in recent weeks.

Manufacturing
Manufacturing activity grew moderately in recent weeks. A South Carolina copper parts manufacturer noted increased sales in both foreign and domestic markets, and an electronics manufacturer in Maryland reported an increase in defense-related orders. A South Carolina packaging manufacturer saw improved business conditions and began to increase capital investment in anticipation of higher interest rates. A Virginia wood-product manufacturer reported unpredictable business from week to week, as demand from restaurants increased while demand from retailers slowed. Manufacturers across the District continued to face supply chain disruptions resulting from delays in trucking.

Ports and Transportation
Port activity picked up moderately in recent weeks, with increases in both imports and exports. Faster growth in exports at some ports left them with a better balance in volume growth. Recent increases in exports were largely driven by automotive and commodities shipments. A North Carolina port attributed much of its growth to exporting wood chips to the UK to be used as fuel. However, a Maryland port continued to see more than twice as many loaded import containers as loaded export containers.

Trucking companies saw sustained growth in recent weeks, and many reported being unable to meet increased demand. A North Carolina company reported demand of about two truckloads for every available truck. Trucking companies have continued to turn away business because of driver shortages and expect this problem to worsen in coming months as shipments pick up seasonally in the spring.

Retail, Travel, and Tourism
Retailers experienced somewhat sluggish sales in recent weeks. Many firms noted a drop in revenues but remained optimistic that business would pick up in the near future. District auto dealers were seeing low credit scores prevent many customers from purchasing cars. A Maryland plumbing supplier said business was at a twelve-year high, and a Maryland hardware store saw an uptick in sales resulting from snow storms as people bought gear for removing snow and heating their homes. A West Virginia sporting goods retailer said strong wholesale demand made up for weak retail demand.

Tourism remained robust in recent weeks. Hotel stays around the District continued to increase; however, some North Carolina hotels reported that their business was suffering from increasing competition, despite strong tourism. A Virginia outdoor center reported having to turn away visitors as bookings increased. Tourism in D.C. adjusted down to normal levels compared to abnormally strong business last winter. Also, it did not suffer as much from the federal government shutdown as in the past because of its brevity. District ski resorts experienced a strong season, after a few weak years. However, winter weather hurt tourism elsewhere in the District, particularly in South Carolina, where the Charleston airport was shut down for four days.

Real Estate and Construction
Most Fifth District residential real estate contacts reported increases in sales and buyer traffic, and decreased inventories in the past few weeks. Although prices were generally increasing, one report from Washington, D.C. noted that the average price was lower due to higher sales in the lower price ranges. Agents across the Fifth District commented that lower priced inventory was absorbed quickly and that homes at the higher price points were slower to move. A few reports noted increased demand for large tracts of land for lot and house development, but it would be some time before the construction activity translated into increased inventories.

In commercial real estate, traffic and sales increased and prices were steady in recent weeks, although activity varied by geographic area and industry segment. An executive from Columbia, SC and another from Richmond, VA reported speculative construction in the industrial market. The Columbia report also noted strong activity in retail, including construction of small retail space. There was also steady demand for restaurant space. There were a few reports of slowing office-related activity. On the other hand, office activity expanded in Virginia Beach and there was strong demand for Class A urban office space and Class B suburban space in the Charlotte, NC area.

Banking and Finance
Since our previous report, loan demand increased slightly. Residential mortgage lending was flat to slightly lower, reflecting a typical seasonal slowdown, while refinance loan demand fell slightly. Interest rates edged higher in recent weeks. A banker in West Virginia attributed the decline in mortgage refinancing to the rise in interest rates. Deposits were up moderately, overall. Reports on commercial loan demand varied. For example, lenders in Maryland and North Carolina saw modest increases in commercial lending, while contacts in central Virginia and West Virginia reported flat to slightly lower demand. Credit quality remained strong. Credit standards declined slightly amidst reports of some higher loan-to-value ratios being accepted.

Non-Financial Services
Demand for nonfinancial services rose moderately in recent weeks. Professional and business services and administrative support services were among the sectors to report the strongest demand. An advertising and marketing firm saw steady demand but noted that rising input costs were compressing profit margins as they were unable to raise prices for their services.

For more information about District economic conditions visit: www.richmondfed.org/research/regional_economy