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According to reports from Sixth District business contacts, economic conditions continued to improve at a modest pace in January and early February. Most retailers contacted stated that adverse weather had affected the positive sales trend seen at the end of last year. The hospitality industry experienced moderate growth as hotel occupancy and bookings increased, most notably in Florida. Weakness persisted throughout the District in both residential and commercial real estate. Manufacturers cited growth in new orders along with plans to increase production in the near term. Transportation firms remarked that freight shipments remained stable. Credit conditions improved for segments not related to residential construction and real estate. Labor markets continued to recover at a slow rate, with most businesses maintaining a preference for hiring temporary rather than permanent employees. Some businesses indicated limited plans to pass costs through to consumers in an effort to increase their margins from unusually low levels, recognizing that they may have to reverse course if there is significant buyer push-back.
Consumer Spending and Tourism
Most District merchants reported that retail activity moderated in January and early February following better than expected holiday sales at the end of 2010. In addition, many cited bad weather conditions as having contributed to the reduction in traffic and sales. Retailers mentioned that they would not be adjusting inventories in response to the higher than expected sales at the end of last year. The majority expressed that they will continue using lean inventory management. The outlook among retail contacts for the next few months remained optimistic. District vehicle sales improved from low volumes witnessed a year earlier.
Overall, leisure and business travel increased moderately compared with the previous year. Hotel occupancy and convention bookings were up slightly in many locations despite adverse weather conditions. The strongest gains were reported in Florida, where international visitors increased noticeably. Cruise activity remained healthy as well. Restaurants also noted a modest increase in business as the economy and consumer confidence improved. The outlook among District hospitality contacts for the upcoming months continued to be positive.
Real Estate and Construction
District homebuilders reported slow growth in new home sales for January and early February, while buyer traffic weakened compared with late last year. The majority of homebuilders stated that construction activity was below the year-ago level. Some homebuilders noted rising material costs which they have been unable to pass through because of continued downward pressure on home prices. The outlook for sales growth over the next several months improved slightly from our last report, but the overall level of sales are expected to remain very low.
Residential brokers in the District indicated that existing home sales remained at low levels in January and early February. However, brokers noted that sales exceeded the year earlier level, largely driven by gains in Florida. Outside of Florida, some contacts suggested that adverse weather had dampened sales. Brokers continued to notice downward pressure on home prices from short-sales, REO's, and pending foreclosures. The outlook for sales growth over the next several months improved from previous reports, but total sales are expected to remain low.
Nonresidential construction activity remained at low levels during January and early February. Most commercial contractors said that the environment was little changed since the end of last year. The majority of contacts expect construction activity to remain at low levels this year.
Manufacturing and Transportation
Since December, District manufacturers experienced strong growth in new orders, while production levels increased moderately. Reports showed that the majority of respondents plan to increase production levels in the short term even as many manufacturing firms are experiencing higher input prices. District trucking firms noted both stronger demand and a firming of shipment prices; however, they also indicated that they have been facing increasing fuel costs and extremely adverse weather conditions, which have slightly affected overall activity. Trucking firms also anticipate capacity to remain tight as seasonal demand for shipments increase. District railroad companies reported that volumes remain solid for coal, automotive parts, and container imports. Many railroad contacts noted that higher fuel costs were successfully being passed through as surcharges.
Banking and Finance
District banking contacts reported an increase in mortgage applications in January and early February; most of those attributed the increase in number of applications to refinance activity and lower interest rates. The majority of bankers stated that mortgage lending standards have increased in recent months; while a few bankers reported elevated standards remained unchanged. Small businesses related to construction and real estate in particular, described worsening credit conditions, with many indicating that they either did not receive the amount of credit requested or that they refused the offered credit because of unfavorable terms. Small businesses outside of construction and real estate reported improving credit conditions at community and regional banks.
Employment and Prices
Labor markets across the District continued to recover slowly. Many businesses stated that their hiring plans favor leaving employment levels unchanged or to increase them slightly. Among those firms who plan to increase employment, the major factors driving their decisions are expectations of higher sales growth and right-sizing staff levels that were excessively decreased. District contacts maintained a preference for hiring temporary staff.
Some firms reported plans to pass more of input cost increases through to their consumers as they try to restore margins from unusually low levels. However, most indicated that markups remained below what they considered to be normal. A majority of businesses anticipate rising materials and benefits costs over the next year. A number of contacts, particularly those in manufacturing, noted some concern about the impact of rising commodity prices.
Natural Resources and Agriculture
Contacts along the Gulf Coast continued to express concern that the lower pace of drilling permit issuance and additional rig inspections would stifle future energy production and investment. Regional crude oil inventories have declined from unseasonably high levels in November as cooler weather and holiday travel boosted fuel consumption. Although drilling activity remains well below pre-oil spill levels, the number of rigs operating in the Gulf of Mexico has gradually crept up since October 2010.
Most areas of the District continued to be affected by varying degrees of drought. Cold temperatures negatively affected many vegetable crops in Florida. The outlook for the region's key agricultural commodities - including poultry, cotton, and soybeans � has been brightened by higher prices driven by strong global demand and tight supplies.
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Richmond