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On balance, economic activity in the Fifth District grew at a somewhat slower pace in late July and August as weakness in housing and retail sales offset firming in manufacturing. Residential real estate agents reported declines in sales and more widespread softness in home prices. Additionally, mortgage activity slipped since our last report, though financing continued to be available for those with solid credit. Adding to the less than upbeat tone, District merchants reported weaker retail sales as big-ticket categories continued to slump. Moreover, agricultural conditions across the District worsened over the last six weeks as unrelenting heat and a lack of rain took their toll on crops. Assessments of other sectors were rosier, however. District manufacturers reported increases in shipments and new orders and tourism activity remained strong. Additionally, services firms noted continued healthy revenue growth, while commercial real estate and commercial lending activity were generally steady. On the employment front, despite complaints of tight worker availability, District hiring remained fairly brisk, including the first expansion of manufacturing payrolls in eight months. Price growth in the District edged up slightly during recent weeks.
Our contacts reported that retail sales pulled back sharply in August after posting modest gains in July, as a further drop off in furniture and automobile sales weighed on overall growth. A contact at a department store in the Washington, D.C., metro area reported a drop in furniture sales during the last six weeks, though he added that apparel and jewelry sales were up, fueled, in part, by the start of back-to-school shopping. In contrast, a department store contact in Virginia Beach, Va., reported higher-than-normal levels of inventory, despite good back-to-school shopper traffic and the state's recent tax-free holiday. In addition, a retailer in Charleston, W.Va., said sales had declined since mid-July. On the employment front, retailers generally trimmed payrolls, though those trying to hire said they continued to struggle to find quality workers. On balance, retail prices moved lower in recent weeks, although a contact at a large grocery supplier told us higher costs of meats and dairy products had placed increased pressure on their margins.
Revenue growth at services firms remained healthy in recent weeks, though contacts indicated that the pace of expansion eased somewhat since our last report. Contacts at professional, scientific, and technical services firms in the District reported steady revenue growth in late July and August. Additionally, contacts at education and health care firms said customer demand was unchanged. However, the administrator of a large senior living facility in Virginia said that the housing market slowdown was starting to trim his business as prospective residents were having difficulty selling their homes. Similarly, an executive at a financial services firm in Baltimore, Md., noted that the recent volatility in financial markets had unnerved some clients, resulting in slower business. The pace of hiring at District services firms also slowed somewhat in recent weeks, while price growth in the sector was contained.
District manufacturers reported that activity moved higher in late July and August. Contacts noted solid increases in shipments and new orders, and manufacturing payrolls expanded for the first time since last November. Producers of electrical equipment, food, industrial machinery, and rubber and plastic products posted the strongest gains in output. A plastics producer in North Carolina told us that business had been particularly good in August--both current production and new orders turned higher. In addition, he anticipated that the recent stronger activity would continue into the fall months. Similarly, a manufacturer of packaging materials in South Carolina said demand was "heating up" and that there was a good chance he would be even busier in the coming year. On the price front, contacts indicated that the pace of growth in raw material prices was little changed since our last report, while growth in final goods prices increased slightly.
On balance, demand for home mortgages continued to weaken across the Fifth District during recent weeks. Sources in Bethesda, Md., and Virginia Beach, Va., noted a sharp slowdown in activity, while contacts in Raleigh, N.C., and Charleston, S.C., noted more modest decreases. In contrast, contacts in Richmond, Va., and Parkersburg, W.Va., reported that demand was steady. Lenders said that tighter credit standards were partly responsible for decreased activity. Contacts said they had reduced the number of mortgage products offered, set higher credit score requirements, and raised the interest rates charged on mortgages to address credit and loan quality. Contacts in Baltimore Md., Richmond, Va., and Raleigh, N.C., generally believed the ripple effects from the subprime market will be contained, though they report that standards for commercial mortgage loans have tightened somewhat. A contact in Charleston, W.Va., said their commercial loan standards tightened as they were following guidelines "more strictly." Nonetheless, District bankers generally reported steady demand for commercial mortgages over the last six weeks.
District Realtors reported a further drop off in home sales across the District since our last report. Agents indicated that activity had declined more noticeably in the last six weeks, in part because concern about the health of financial markets has increased. "We haven't been as busy this year as we were three or four years ago, but activity has fallen off even further here recently as more and more clients, spooked by the evening news, remain on the sidelines," noted a Wilmington, N.C., Realtor. Contacts said that recent developments in financial markets have greatly thinned their subprime business, but that clients pursuing conventional loans continue to have adequate access to financing. Despite softer sales, listing activity has remained generally on track in recent weeks, though a Realtor in Raleigh, N.C., noted some clients were considering converting their unsold homes to rental units. Residential agents also reported an increase in the number of foreclosures, and noted higher inventories with the average number of days on the market continuing to rise. Moreover, contacts indicated that home prices moved lower in many markets in recent weeks as sellers set more "realistic" prices. One agent in Hagerstown, Md., remarked, "...sellers are finally getting the message on prices." Realtors throughout the District generally said that they view the recent downturn as a "necessary correction" needed to move to more sustainable levels of activity.
On the commercial side, agents reported a slight slowdown in office leasing in late July and August, while retail and industrial activity remained generally healthy. Contacts in Washington, D.C., and Columbia, S.C., reported that a normal, seasonal pause during the height of summer vacations contributed to softer leasing activity. Reports on vacancy rates were mixed. In Washington, D.C., and Raleigh, N.C., contacts reported that office vacancy rates were steady in recent weeks, while agents in Columbia, S.C., and Charlotte, N.C., noted slight decreases in office vacancies. Retail vacancy rates across the District were generally unchanged during the last six weeks. Reports on rental rates varied. Office rents were said to have risen a bit in late July and August, though one contact in Washington, D.C., noted a slight dip in rates in some office submarkets. Amid fears of tightening credit, agents in northern Virginia and Washington, D.C., indicated that financing was still available for new projects, though lenders were exercising more caution. Contacts reported little to no new construction activity.
Tourist activity remained strong in late July and August. Along the coast, contacts in Myrtle Beach, S.C., and on the Outer Banks of North Carolina reported brisk restaurant and retail sales, which they attributed to near-perfect weather and later starting dates for North and South Carolina schools. Similarly, a hotelier in Virginia Beach, Va., told us that bookings had picked up since our last report. On the western edge of the District, a manager at a mountain resort in Virginia said that sales of time shares were going well and that tourists were "not holding back" when it came to spending at his establishment.
District temporary employment agents generally reported stronger demand for workers in recent weeks, noting that it remained difficult to find qualified, skilled workers. In addition, agents in Raleigh, N.C., and Richmond, Va., expected demand for temporary workers to strengthen further over the next several months, as businesses resorted to temporary workers amid especially taut local labor markets.
Severe, drought-like conditions persisted in many areas of the Fifth District in July and August. Despite widespread rainfall during the second half of August, soaring temperatures and depleted ground moisture reduced potential crop yields, particularly in Maryland, where over 60 percent of the soybean crop and 55 percent of the corn crop were reported to be in poor to very poor condition. In Virginia, a contact reported that the supplemental feeding of livestock continued as pasture conditions deteriorated further. In addition, cattle farmers in Virginia were culling their herds to get ahead of possible feed shortages this fall and winter.