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Federal Reserve Bank of Richmond

07/15/2020 | Press release | Distributed by Public on 07/15/2020 14:04

Beige Book

Federal Reserve Bank of Richmond

Summary of Economic Activity
The Fifth District economy grew compared to our prior report, although economic activity generally remained well below pre-COVID-19 levels. Manufacturers experienced a slight uptick in new orders but shipments of finished goods were little changed. Ports reported modest declines in both imports and exports. Trucking companies, on the other hand, indicated a modest increase in demand as the reopening of stores and restaurants spurred new shipments. Retail shopping picked up modestly as more stores were able to reopen, but sales remained below year-ago levels. Leisure travel and tourism activity increased moderately, particularly at drivable locations. Business travel, in contrast, remained depressed. Residential home sales increased despite a low inventory of existing homes. Commercial real estate leasing rose modestly, overall, due to strong demand for industrial space. Bankers reported a slight increase in lending, predominately loans for home purchases and mortgage refinancing. On balance, demand for nonfinancial services declined moderately. Employment rose moderately in recent weeks as many firms called back previously furloughed or laid-off workers; however, total employment remained well below pre-pandemic levels. Price growth increased modestly, overall. Prices for some goods, like personal protection equipment, rose sharply due to supply chain disruptions and high demand.

Employment and Wages
Since our previous report, employment increased as firms across a wide variety of industries reported calling some of their previously separated employees back to work, hiring new workers, and posting for vacant positions. Despite the rise in employment in recent weeks, total employment remained considerably below pre-pandemic levels. Several contacts noted challenges bringing workers back, including fear of contracting COVID-19 at work, inability to find childcare, or their ability to make more money on unemployment. While most firms reported no changes to wages or salaries, a few said that they cut hourly wages to reduce costs.

Prices
On balance, price growth picked up modestly in recent weeks. According to our most recent surveys, manufacturers reported a slight increase in both prices paid and prices received while services sector firms reported a moderate increase in both price measures. One service firm noted that supply chain disruptions and high demand for personal protection equipment led to a substantial increase in prices for those goods.

Manufacturing
Manufacturing conditions in the Fifth District were little changed since our previous report. Shipments were fairly steady, and new orders increased slightly. However, lost revenue forced some manufacturers to cut budgets and discretionary spending as well as cancel capital spending projects. Customers who were unable to pay for products created additional stress for manufacturers. Payroll Protection Program (PPP) loans allowed some companies to remain solvent. One firm that contracts with government agencies expressed concerns about government budget changes in the wake of the virus. Some firms were able to offset losses, by shifting production to COVID-related goods such as medical supplies or sneeze guards.

Ports and Transportation
Fifth District ports experienced modest declines in shipping volumes in both exports and imports in recent weeks. On the import side, declines were seen in home furnishings, autos, and engine parts, while apparel and medical supplies showed some strengthening. Port contacts attributed some of the weakness in exports to supply chain disruptions. One port lost business as large retailers closed, eliminating distribution centers. Ports saw some canceled calls, although not as many as in the last few months. An airport operator said cargo flights had increased to partially offset the decline in cargo space from the reduction in passenger flights.

Trucking companies in the Fifth District reported a moderate increase in demand since our last report. Contacts noted increased shipments of retail goods and wine as stores and restaurants reopened. Shipments of food, cleaning supplies, and home-improvement goods remained strong. Some businesses reported lingering softness as shipments were still below last year. However, one company had more freight than it could haul and looked to expand its fleet, while others continued capital expansion plans in order to be well-positioned upon full recovery. Spot market activity picked up, and most customers who had temporarily shut down reopened.

Retail, Travel, and Tourism
Retailers reported that business picked up modestly in recent weeks as more stores were able to reopen, but demand remained below the level of a year ago. Several companies struggled as supply chain disruptions led to low inventories. In particular, automobile dealers reported that manufacturer shutdowns led to low inventories of new cars, which boosted sales of used cars. In addition, the supply of used cars increased as rental companies closed and corporations sold their excess fleet vehicles. Some retailers also experienced soft demand, and one store expressed concerns that closures of nearby restaurants would hurt business. However, others, such as grocers, hardware stores, and consumer appliance and electronics stores, had strong sales, and some faced higher demand than they could meet.

Travel and tourism improved moderately since our last report but were soft compared to last year. Hotels and vacation rentals in some areas reported high occupancy, spurred by leisure travel, particularly in the drivable market. However, business travel remained low, and event venues were hit by lack of conventions, which they anticipated would hurt business for some time. Meanwhile, restaurants continued to struggle as they operated at reduced capacity, and some shut down because of virus spikes or fear of vandalism. Attractions, theaters, and performing arts groups struggled as many remained closed and those that opened had soft demand.

Real Estate and Construction
Fifth District home sales increased modestly since our last report. Realtors said business picked up after some softness in recent months. Contacts reported that demand exceeded supply, partially because listings were low, as people were still reluctant to show their homes. Days on the market decreased, and low interest rates boosted sales. Realtors noted particularly strong demand for lower priced homes, but low listings caused some customers to shop in higher price ranges than they had originally planned. New construction continued, but starts were delayed due to the remote work and distancing policies of local agencies.

Commercial real estate leasing increased modestly but remained soft compared to pre-pandemic levels. Rental rates were somewhat lower, but contacts said buyers were not getting the low prices they expected. Retail remained weak as some stores and restaurants closed permanently. Office leasing was modest, and several tenants asked for short-term lease renewals in order to allow them to re-evaluate their use of and need for office space. Industrial leasing remained strong, and one broker expected a continued rise in industrial leasing to allow companies to hold more inventory. Multifamily leasing was somewhat soft, and some landlords increased concessions to attract tenants.

Banking and Finance
Overall, loan activity picked up slightly for this period. Respondents reported higher residential mortgage growth and strong demand for mortgage refinancing. On balance, conventional commercial lending declined moderately, although demand improved slightly in Fifth District states that reopened earlier. Auto lending remained below year-ago levels. Deposit growth continued to be strong, despite lower rates on interest-bearing accounts, driven mainly by proceeds from federal aid disbursements. Delinquency rates remained low, but a few financial institutions reported being more cautious in terms of their underwriting in light of the pandemic.

Nonfinancial Services
Nonfinancial services firms reported moderate declines in demand and revenues in recent weeks. Several contacts who engaged in business to business services, such as consulting, employee training, and marketing, said that their clients have reduced spending as a result of their own revenue declines. A few others said that revenue was down because they could not attend conventions and events, which typically generate new business for them. Lastly, an executive from a firm that provides services to federal government agencies expressed concerns that budget cuts would result in reduced demand in 2021 after current contracts expired.

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

Federal Reserve Bank of Atlanta

Summary of Economic Activity
On balance, economic activity in the Sixth District remained weak from mid-May through June. Labor markets improved somewhat as businesses in parts of the region reopened. Nonlabor costs remained subdued. Reports from retailers noted strong consumer demand and increased sales of automobiles. Tourism contacts reported that attractions and hotels had begun to reopen, but revenues and employment levels were expected to be constrained by mandated capacity limits. Demand for residential real estate strengthened and inventory levels fell resulting in upward pressure on home prices. Commercial real estate market conditions were mixed. Manufacturing activity declined, and reports on new orders were mixed. Financial institutions reported a deterioration in conditions as COVID-19 impacted some firms' credit. Overall commercial loan growth was slow and consumer lending remained soft.

Employment and Wages
Labor conditions improved modestly since the previous report. Some firms reported slowly recalling workers and increasing hours as demand increased, while others remained in a holding pattern. Many of those bringing employees back indicated staffing was not back to pre-pandemic levels. While some employers reported taking measures to cut less productive processes and employees, others were able to acquire more skilled and productive staff due to greater talent availability. Although some remote workers returned to the office, many firms indicated success with remote arrangements and noted they will continue this stance for the near term and possibly beyond. Some employers remained committed to maintaining employment levels and plan to reduce hours, wages, and possibly benefits to maintain those levels; however, most indicated that demand will determine staffing levels in the second half of the year. As the support from the Paycheck Protection Program winds down, many employers indicated that they will be forced to lay off workers should business remain weak.

Contacts continued to report wage and salary cuts, except at the low-end of the pay scale and among essential workers. Reports on the disincentive to work from receiving unemployment insurance benefits were mixed.

Prices
Contacts continued to note muted input costs and little to no pricing power. Though many described rising costs associated with sanitation practices and Personal Protective Equipment used to protect employees and clients from COVID-19, most reported an inability to pass along these additional costs. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs remained steady, on average, at 1.2 percent in June. Year-ahead expectations increased somewhat to 1.7 percent.

Consumer Spending and Tourism
Retailers reported healthy demand as many stores reopened. While some noted that there was still uncertainty clouding their outlook, expectations are for sales and margins to improve over the remainder of the year. Auto dealers reported increased sales activity since the last report.

Tourism and hospitality contacts noted that they have begun to reopen hotels and attractions in accordance to recommended guidelines. However, business capacity will be constrained by social distancing requirements which will continue to negatively impact both revenue and employment.

Construction and Real Estate
District housing market conditions improved significantly over the reporting period. Pent-up demand and low interest rates accelerated home sales. In many markets, home inventories contracted significantly, creating strong upward pressure on home prices. Despite low interest rates, affordability remained a concern as median home prices continued to reach new highs in several markets. The limited supply of existing homes increased demand for new homes. 30-day delinquencies rose sharply, especially in South Florida markets, despite a surge in forbearances.

Commercial real estate (CRE) contacts reported continued challenges associated with the effects of the COVID-19 pandemic. Hard hit sectors like retail and hospitality reported some stabilization as local economies reopened; lower-price point hotel brands saw improvements in occupancies and values from record lows in May through early June. Multifamily owners reported minor softening in occupancies and were offering greater concessions to minimize lease turnovers. There were growing reports of tenants and borrowers seeking relief. Investment activity was muted compared with pre-COVID-19 levels. Contacts reported that capital was readily available at banks; however, underwriting criteria tightened for the financing of operating CRE projects, and originations continued at a subpar pace. Contacts reported that high-quality asset values declined marginally, and hospitality and retail sector assets declined at a more accelerated pace since the beginning of the pandemic.

Manufacturing
Manufacturing contacts indicated that overall business activity decelerated, but at a somewhat slower pace than the previous report. While most firms reported decreases in new orders and production levels, a modest rise in new orders was noted by a few contacts. Purchasing managers suggested that supplier delivery times were getting longer as some supply chain disruptions continued. Contacts also cited a decline in finished inventory levels. Expectations for future production levels declined, with only one-fifth of contacts expecting higher production levels over the next six months.

Transportation
Transportation activity was largely unchanged since the previous report. Class I railroads saw slight improvements in volumes; however, total rail traffic remained substantially weak. Short-line railroads noted declines in shipments of autos and increases in aggregates and building materials. Ports experienced a significant reduction in auto imports and container traffic was down. Inland barge companies cited modest improvements in demand, but movements of energy products were soft as refineries continued to operate below capacity.

Banking and Finance
Conditions at financial institutions deteriorated over the reporting period due to credit issues related to the COVID-19 pandemic. Provisions for loan loss reserves increased significantly for most institutions, in preparation for increased charge-offs once forbearance periods end, exerting downward pressure on earnings. Additionally, lower short-term interest rates further compressed net interest rate margins. Loan growth remained muted with most centered on approvals of new loans under the Paycheck Protection Program. Except for first lien residential mortgages, consumer loan growth was flat partly due to tightening credit standards. Liquidity remained healthy as deposit levels increased.

Energy
Energy industry contacts continued to report weak demand, oversupply, and constrained global storage capacity for crude oil, liquefied natural gas, and refined products such as distillates. Oil and gas producers noted that they expect U.S. oil production to take one to two years to return to pre-COVID-19 levels. Fuel distributors reported little to no demand from municipalities, transit authorities, school systems, and airlines, while demand from food wholesalers and grocers remained solid. Utilities in the region indicated that reductions in demand were not as large as anticipated in the first quarter. While utilities contacts noted that planned capital investments will continue through 2021, other energy sectors reported delayed or cancelled projects, cuts to budgets, and layoffs, some permanent, over the same period.

Agriculture
Agricultural conditions remained weak. Mostly drought-free conditions prevailed. On a month-over-month basis, June's production forecast for Florida's orange crop was down from the previous month and last year, while Florida's grapefruit production forecast was down from the previous month but remained ahead of last year. The USDA reported that in May, year-over-year prices paid to farmers were up for rice, soybeans, and eggs but down for corn, cotton, cattle, broilers, and milk. On a month-over-month basis, prices increased for cotton, rice, cattle, and broilers but decreased for corn, soybeans, eggs, and milk.