The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Overview. District economic activity generally grew at a modest pace in recent weeks. District manufacturing growth slowed, and retail sales flattened, with the exception of food and vehicle sales. Non-retail services providers reported stable to stronger demand, and tourism activity was at normal winter levels. Commercial and consumer lending varied by location, while the environment remained competitive. Residential real estate activity continued to improve; reports on commercial real estate activity, however, were mixed. Agricultural conditions remained favorable. Oil and natural gas production held steady at high levels during the past six weeks, but coal production fell. Labor market conditions weakened somewhat since our last report. Manufacturers’ input prices were little changed, while finished goods prices rose at a slower rate, and the pace of wage growth remained moderate. Services providers’ prices rose slightly faster and non-retail wage growth edged up. Retail price increases slowed, and wages fell.
Manufacturing. District manufacturing continued to expand, but at a more modest pace since our last report. A furniture manufacturer said that his business had improved through gains in market share and new product introductions, and that the improvement should continue in 2013. A spokesperson for the technology industry reported that 2012 was expected to be flat, but instead grew by ten to twelve percent. Another contact stated that, “Manufacturing is hanging in there,” noting that niche markets were doing best, but only if they were not dependent on international demand. A producer of lumber products commented that sales volumes and orders dropped, in part because of Hurricane Sandy’s impact on their customer base in the northeast. An electrical components manufacturer reported that business was “terrible,” adding that his only sales were to replace ruined equipment from Hurricane Sandy, and that export orders to Europe had dropped off. According to our latest survey, raw materials prices were relatively flat, while finished goods prices rose at a slightly slower pace.
Ports. The typical seasonal surge in import volumes shifted as a result of two major events. The first was the threat of an East Coast port strike that has loomed since the September 2012 expiration of the master contract between the International Longshoremen’s Association and the U.S. Maritime Alliance. A number of shippers used alternative West Coast and Canadian ports ahead of the peak season to minimize disruptions to their businesses. Secondly, Hurricane Sandy caused diversions to Fifth District ports, boosting an already solid peak season. In addition, bulk fuel shipments that were diverted to the Northeast created “a pinch in supply” for companies located further south. Exports of resins for plastics, grains, forestry products and metal scrap were especially strong, with imports being led by beverages and retail goods. Both exports and imports of auto-related products were robust.
Retail. Retail sales flattened, with the exception of food and vehicle sales, according to most merchants contacted since our last report. Several blamed the lackluster sales on the federal government’s failure to resolve its fiscal issues. Most retailers responding to a special poll indicated that they planned an equal amount of holiday discounting as a year ago. A West Virginia department store manager reported that sales were a little soft ahead of Christmas, while other retailers noted little change. In contrast, many grocers noted an uptick in revenues. Although big-ticket sales were weak overall, car sales rose by double-digit percentages in recent weeks. Federal fiscal indecision also pushed sales of heavy trucks, construction equipment, and buses at the end of 2012, ahead of the possible expiration of bonus depreciation. According to survey respondents, retail price growth slowed during the past month.
Services. Services firms reported stable to stronger demand since our last report. An executive at a national freight trucking firm indicated that revenues flattened in the District, while another trucking company reported that demand slowed slightly, although that company was able to improve its margins. Demand strengthened at telecommunications and engineering firms, and a contact in Washington, D.C. remarked that law firms see regulatory practice as a growth industry. During the week of Christmas and New Year’s Day, the CDC reported that the flu had become widespread across the District. An executive at a North Carolina healthcare facility commented that the “flu season hit early and hard,” more than doubling the average number of cases for that time of year. Non-retail services prices rose slightly faster in recent weeks, according to survey respondents.
Tourism activity was at normal winter levels in recent weeks, and rate changes were modest. In addition, a D.C. contact commented that restaurant bookings were brisk for holiday meals and events. An executive at a Virginia resort area said that his rentals were filled up for the week from Christmas through New Year’s Day. A source on the outer banks of North Carolina reported somewhat less tourism activity, compared to a year ago because of lingering road problems caused by Hurricane Sandy.
Finance. Demand for both consumer and commercial loans varied across the District. A North Carolina lender noted that mortgages for new purchases of homes declined, in part because of economic uncertainty. However, a second North Carolina lender said new financing is outpacing refinancing at his bank. According to another North Carolina banker, the home mortgage business is improving and he indicated that refinancing has strengthened in his region; in addition, a number of lenders stated that the competition among lenders for refinancing business has been aggressive. Finally, a banking contact with several locations in the District reported that demand for consumer loans and mortgages had not changed much. Bankers in Maryland and West Virginia reported that foreclosures have slowed. A West Virginia banker said that while overall credit quality has been very good, residential mortgage delinquencies have crept up slightly, and that demand for commercial credit had been steady at a relative high rate in recent weeks. Another West Virginia banker remarked that his region’s commercial and industrial loan demand had slowed because economic progress has been “lumpy.” A banker in North Carolina reported that loan demand from businesses had remained weak despite lower borrowing rates, owing in part to economic uncertainty.
Real Estate. Residential real estate activity continued to improve since our last report. A contact in South Carolina said that the real estate market was dynamic in the Charleston area and that demand and pricing were stronger than they had been in a long time. A Realtor in the Washington, D.C. area expects a strong market through early 2013, as the combination of record low inventory and low interest rates encourages new listings. A contact in West Virginia told us that home sales in his area have improved considerably and that prices were flat for the first time since the drop in values two years ago. Another source saw improvement in the “move up” market but little to no activity in the speculative market. He also remarked that the start-up market for housing remained flat and that the effect of student loans on credit scores was a cloud over the mortgage market.
Reports were mixed on commercial real estate and construction markets in the District. While a few contacts reported modest improvement in activity since our last report, others noted flat activity or modest declines. A developer in the Carolinas said that absorption rates in the office sector tightened in the downtown Charlotte area, but vacancies in suburban areas remained elevated. In contrast, a real estate representative in Virginia indicated that office park absorption rates in the Roanoke suburbs were good, with ninety percent occupancy rates, which he attributed to new medical facilities. However, he noted that vacancies in the downtown area were considerably higher. Most sources also mentioned tightening of available office space, especially among Class A properties, due to lack of new construction. A Charlotte Realtor stated that leasing rates in the industrial sector continued to decline this year and noted little new development in the retail sector. Moreover, several realtors reported that rental rates were soft, noting that it was a “tenant’s market.” However, all contacts were in agreement that concessions were decreasing.
Agriculture and Natural Resources. Agricultural conditions remained favorable. Oil and natural gas production remained at high levels during the past six weeks. December was relatively mild across most of the District, with warmer than normal temperatures and significant precipitation. Small grain conditions improved with the added moisture, as did pastures and hayfields.
Although conventional oil and natural gas production held steady at high levels, the rig count fell in West Virginia. Cushioning the fall, many companies continued to drill in order to get wells in place before permits expired. In contrast, coal production fell last year due to lower demand from domestic utilities and offshore customers, idling many mines. One coal producer attributed the depressed coal market to stricter regulations coupled with lower natural gas prices, as well as a weaker economy both in the United States and in Europe.
Labor Markets. Conditions in labor markets weakened since our last report. There were several reports of soft demand for workers in part because businesses were reluctant to hire in the politically uncertain climate. Retail employment dropped sharply in recent weeks, and several service sector contacts indicated that hiring decisions were in a holding pattern. Exceptions were to fill vacated positions and to ease nursing shortages, and a Washington contact remarked that restaurants were paying bonuses to attract managers. Sources continued to report difficulty finding qualified workers to fill vacancies, particularly in advanced manufacturing. Two Virginia temporary employment agencies noted increased demand for high tech and highly skilled workers. According to an ad hoc poll, less than half of the retailers who made seasonal hires expected to offer those employees a permanent position after the holidays. Wage growth in manufacturing remained moderate, even among skilled workers, while average retail wages declined. In contrast, non-retail service sector wages continued to rise at a moderate pace.
SOURCE: Federal Reserve Board