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Beige Book Report: Richmond

May 30, 2018

Summary of Economic Activity
The Fifth District economy expanded at a moderate pace in recent weeks. Manufacturing conditions improved moderately and port activity remained strong. Trucking demand remained robust, and driver shortages have led some trucking companies to turn some business away. As a result, some shippers turned to rail. Reports from retailers were mixed as furniture and equipment sales picked up but new car sales declined. Travel and tourism remained strong, despite some adverse weather limiting outdoor recreation. Residential real estate markets improved modestly as home sales were steady, while inventories remained limited. Commercial real estate leasing activity increased, particularly for retail and industrial space. Overall, loan demand grew modestly and competition for deposits intensified. Nonfinancial services firms reported a modest rise in demand. Natural gas and coal production picked up in recent weeks while agriculture reports were mixed. The demand for labor continued to strengthen while supply remained tight across industry sectors. Prices rose moderately; firms reported rising steel and aluminum prices and increasing transportation costs.

Employment and Wages
Labor demand continued to strengthen moderately in recent weeks, while supply remained tight across industry sectors. Employment agencies noted a slight decrease in job openings compared to the strong spring recruiting levels. Staffing firms reported increased demand for warehouse managers, customer service representatives, and medical and legal professionals. Meanwhile, business owners reported difficulty filling positions for carpenters, machinists, electricians, engineers, truck drivers, IT professionals, and construction workers. Wage increases remained modest across sectors, but a few firms reported increased wage pressures.

Prices
On the whole, prices grew at a moderate rate since the previous Beige Book. According to our most recent surveys, manufacturers reported moderate growth in input prices while selling prices rose at a more modest pace. Manufacturers saw input prices rise for steel and aluminum, corrugated boxes, specialty chemicals, paint, and hardware. Additionally, rail and truck transportation prices moved higher. Homebuilders continued to report higher prices for raw materials and for land and lots. Service sector price growth remained modest, overall, but firms expected prices to rise at faster pace over the next six months. Metallurgical coal prices were little changed in recent weeks while thermal coal prices rose slightly.

Manufacturing
Manufacturing business conditions improved moderately. A cabinet manufacturer attributed an increase in demand to companies beginning to spend more after the tax cuts. A Virginia engine manufacturer said that high demand was causing the firm to produce as fast as it could get raw materials. Meanwhile, a West Virginia wood products manufacturer reported record business but thin profit margins because of high costs of lumber and rising trucking prices. Many manufacturers continued to express concerns about the negative impact that rising steel prices could have on their businesses, and a North Carolina door frame manufacturer anticipated a bad year because of high aluminum costs.

Ports and Transportation
Activity at District ports remained robust in recent weeks as contacts reported record volumes and expectations for continued strength. One port executive said that volumes remained strong despite some volatility in shipments resulting from delays at other east coast ports. Increasing shipments led one port to increase loading hours for trucks, but it still had to shift more of its volumes to rail as truck capacity dwindled. At least one port was investing in more terminals with the expectation that strong year-over-year volume increases will continue well into the future.

Trucking remained strong in recent weeks as companies struggled to meet the high demand with a shortage of drivers. A Virginia trucking company said they were investing in better equipment in an effort to recruit drivers. Meanwhile, a North Carolina trucking company reported quadrupling rates for high-risk customers in order to ease demand but found that some customers were willing to pay the new rates. Higher shipping rates allowed trucking companies to increase profits despite rising labor costs. Many shippers had to turn to rail as trucking firms turned them away. A Virginia rail company reported seeing record profits so far this year but also struggled to keep up with demand.

Retail, Travel, and Tourism
Retailers reported mixed business conditions recently. A Virginia hardware store said that sales were volatile, which was largely weather-related, but a West Virginia equipment company reported record high sales. A Virginia furniture store saw strong business but struggled with high inventory. Several retailers expressed concerns about future profits because of rising steel and labor costs. Auto dealers in North Carolina and Virginia reported weakening sales, particularly in new cars, as high prices and rising interest rates reduced affordability.

Travel and tourism activity remained strong, overall, in recent weeks despite some adverse weather conditions. For example, a Virginia resort reported strong bookings despite the weather but low participation in outdoor activities. Graduations brought business to many hotels and leisure travel picked up in Washington, D.C. In Charleston, South Carolina, hotels and restaurants saw stronger sales but were concerned about the number of new establishments scheduled to open in the next year. Despite reporting high revenue, a West Virginia adventure center expressed worries about low state tourism funding.

Real Estate and Construction
Home sales increased modestly in recent weeks. District Realtors reported that single family inventories remained low, new listings continued to sell quickly, and traffic was slightly lower. A Washington, D.C., agent saw more homes selling before being listed, and the median days on the market declined to just eight days. In other areas, average days on the market edged down further from existing low levels, while home prices continued to rise modestly. New home sales and construction slowed slightly as overburdened subcontractors were slowing down new home production. However, in most markets, new residential development picked up in recent weeks.

Commercial real estate leasing rose moderately in recent weeks as brokers reported strong demand for retail and industrial space; however, reports on office demand were mixed. 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 warehouse and industrial building sites representing the majority of transactions. Commercial construction increased modestly in some regions. Multifamily leasing remained healthy in most markets.

Banking and Finance
Since our previous beige book, loan demand grew modestly. Overall, bankers said that consumer demand was increasing at a healthy rate; however, reports on demand for business and commercial loans were mixed. In the District on the whole, residential mortgage demand grew at a modest pace. Deposit rates increased, and contacts reported that competition for deposits had intensified. Credit quality remained strong while credit standards were generally unchanged. Interest rates rose slightly in recent weeks.

Nonfinancial Services
Overall, the demand for nonfinancial services rose modestly in recent weeks. Demand strengthened for warehouse and storage leasing and for management and administrative support services. Creative services, such as marketing, also saw stronger activity. Meanwhile, demand softened for telecom services, health and social services, and for some professional and business services that rely on federal spending.

Agriculture and Natural Resources
Natural gas production rose moderately and pipeline construction picked up since our previous report. Coal production increased slightly as coal exporting was buoyed by supply disruptions in Australia. Agricultural reports were mixed as poultry demand rose but dairy farm activity declined.

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