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Beige Book Report: Richmond

January 16, 2019

Summary of Economic Activity
Since our previous Beige Book report, the Fifth District economy expanded at a modest rate. One exception was the manufacturing sector where many firms reported a decline in shipments and new orders and continued to report high input costs due to tariffs. Meanwhile, District ports saw robust activity, mainly from imports as companies tried to get goods in the country ahead of anticipated tariff increases. Trucking remained strong but companies continued to report capacity constraints in both labor and trucks. Travel and tourism increased modestly, overall, while retail shopping was hampered by adverse weather. Residential real estate activity picked up modestly with an increase in home sales but a decline in buyer traffic. Meanwhile, demand for commercial real estate increased moderately, with notable strength in industrial leasing. Lenders saw a modest increase in demand, particularly for commercial lending. On balance, nonfinancial services firms experienced modest growth. Energy sector firms reported moderate growth as coal production increased and pipeline construction continued. The demand for labor increased moderately while wage growth remained modest. Price growth remained moderate, overall, despite firms' reports of higher input costs.

Employment and Wages 
On balance, the demand for labor increased modestly in recent weeks, but firms indicated that hiring remained constrained by the tight labor market. Some of the most hard-to-fill positions were electricians, hotel and restaurant workers, construction workers and managers, computer engineers, and cyber professionals. Meanwhile, a staffing agency reported a decrease in demand for temporary staffing services as more clients were hiring full-time workers instead. Wage growth remained modest, overall; however, a few contacts reported sharp increases in starting wages for particular positions.

Prices 
Since our previous Beige Book report, price growth remained moderate, overall. According to our most recent surveys, manufacturing firms continued to report margin compression as input price growth outpaced selling price growth. Several manufacturers attributed the rise in input costs to tariffs. A food manufacturer added that the loss of domestic crops due to adverse weather forced them to turn to higher-priced imports, which were subject to tariffs. Likewise, service sector firms saw moderate price growth for selling prices that was outpaced by input price growth. Several services firms also attributed higher input costs to tariffs.

Manufacturing
A large share of the Fifth District manufacturers surveyed reported a decline in shipments and new orders in recent weeks. Some firms attributed the decrease to slowing global demand, adverse weather conditions, and/or seasonal factors. Meanwhile, rising raw materials costs were widely reported with some price increases being attributed to tariffs. A Maryland can manufacturer looked for ways to increase automation to reduce the number of employees in order to help offset the rising cost of raw materials. A Virginia display case manufacturer had Chinese goods shipped through west coast ports in order to get goods to the country ahead of an anticipated tariff increase. Meanwhile, a West Virginia steel company increased capital expenditures as they experienced strong business.

Ports and Transportation
Fifth District ports saw robust activity in recent weeks. Import volumes continued to exceed export volumes. Port executives noted a slight softening in auto exports but saw strong growth in imports, particularly from China. They attributed much of the strong import volumes to orders being made early to avoid possible tariff hikes, and they expected trade to soften in the next few months. One port had to store incoming cargo for retailers who did not have adequate storage space. A District airport reported strong demand despite some weather related cancellations.

Demand for trucking remained strong in recent weeks despite a typical seasonal slowdown in shipping. Trucking firms continued to report capacity constraints. Some companies looked for more drivers to hire while others had enough drivers but not enough trucks. Trucking firms were generally optimistic about future growth and continued to make capital investments, but some contacts expressed concerns about tariffs and rising interest rates.

Retail, Travel, and Tourism
Travel and tourism grew modestly in the Fifth District in recent weeks. In Asheville, North Carolina, hotels were fully booked through the holidays, and tourism remained strong in Charleston, South Carolina, despite poor weather. However, hotels in Washington, D.C., saw lower occupancy and fewer meeting space reservations. New hotels and restaurants continued to open around the Fifth District, and some business owners expressed concerns about retaining their staff as competition increases. A Virginia resort executive noted that heavy reliance on J1 visa holders made them vulnerable to possible changes in immigration law.

Retailers in the Fifth District reported mixed conditions since our last report. Many firms felt that inclement weather hurt their business. A North Carolina auto dealer reported good business, particularly for new cars that had strong manufacturer's incentives, but saw a slight softening in demand for used vehicles. A West Virginia store saw profit margins decline as they were unable to pass along higher transportation costs. Conversely, a Maryland retailer was able to raise prices to pass along higher costs that stemmed from steel tariffs.

Real Estate and Construction
Residential real estate firms indicated modest growth, overall. Home sales rose modestly in recent weeks and were reportedly up compared to last year. Sales prices increased modestly, overall. Meanwhile, home inventories remained at low levels, as homes in good condition continued to sell quickly. However, contacts reported a slight uptick in days on the market in the past few weeks because of reduced buyer traffic. In most markets, new residential construction continued at a modest pace with limited speculative construction.

On the whole, commercial real estate activity picked up moderately in recent weeks. District brokers continued to report strong industrial leasing activity, and in the office and retail sectors, only a few contacts reported the normal seasonal slowing. District brokers continued to report low vacancy rates and strong absorption rates. Rental rates generally increased across the industrial market while rate increases were reportedly stable to flat for retail and office space. Multifamily leasing remained strong, but reports on construction activity varied across the District.

Banking and Finance
Loan demand grew modestly in recent weeks as gains in commercial lending drove the overall increase. Residential mortgage lending was generally reported as flat to down slightly compared to about a month ago, but up from the same time last year. On the commercial side, real estate loan demand picked up moderately. Deposits rose moderately, on balance, in recent weeks. Business loan demand increased slightly while automotive lending was reportedly flat. Credit quality and credit standards remained strong throughout the District.

Nonfinancial Services
Since our previous Beige Book, nonfinancial services demand increased modestly, overall. The most positive reports came from firms in the tech sector. A software development firm and an IT consulting business reported strong growth. Also, a Fifth District university reported an increase in interest in computer science and IT related majors. Meanwhile, an accounting firm experienced solid growth and expected continued growth in 2019.

Agriculture and Natural Resources
Energy sector contacts reported moderate growth. Coal production increased in West Virginia as the demand for coal exports remained strong and prices were fairly stable. Pipeline construction continued but was running behind schedule due to adverse weather conditions. In addition, construction in some areas was halted over environmental issues.

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