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Outside of continued strength in District housing markets, and a pickup in retail activity in some areas, there were only scattered signs of growth in the Fifth District's economy in July and August. Manufacturing activity was essentially flat; shipments edged lower and new orders were unchanged. Services firms' revenues also were flat, and retail sales growth strengthened in some areas but was sluggish in others. Residential mortgage lending rose as mortgage interest rates continued to trend down, while commercial lending remained weak. District home sales were strong, but with the exception of some pickup in retail leasing, commercial real estate activity was little changed. Price inflation remained modest throughout the District's economy. In agriculture, recent rainfall helped crops, but prolonged hot and dry weather during much of the summer reduced corn and soybean yield prospects and distressed pastures.
Retailers in the District said sales growth was mixed in the weeks since our last report. In Gastonia, N.C., contacts said layoffs at textile plants had led to weaker sales. In contrast, a large department store with locations throughout the District reported that their business had been up. In Virginia's Tidewater region, a big-box retailer described the pace of sales as unchanged from six weeks ago, and a department store manager there characterized sales as "good." Reports from automobile dealers were mixed, and many were offering manufacturers' price incentives to reduce inventory as they got ready for next year's models. Most District retail businesses were not hiring, but a respondent at an upscale retail firm said it had difficulty finding staff for its planned new store in the Washington, D.C., area.
Services firms generally reported flat revenues in recent weeks. Trucking firms in Maryland and North Carolina reported that demand softened and healthcare systems and hospitals in the Fifth District reported that demand was flat. Restaurants in Charleston, S.C., and around the Chesapeake Bay reported decreased revenues. However, internet services companies in central North Carolina, West Virginia, and suburban Washington, D.C., told us that demand had increased. Several North Carolina firms that assist with business bankruptcies also said they saw stronger demand in manufacturing-dependent regions, suggesting weak economic conditions persist in those areas.
The pace of District manufacturing activity was sluggish in the weeks since our last report. Shipments edged lower, while new orders and employment were little changed. Capacity utilization edged higher in August after several months of declines. According to our contacts, demand softened further in the chemicals, electronics, furniture, and textiles industries. A North Carolina chemical producer told us that his firms' shipments and new orders declined in August. He said that his company remained cautious about capital spending because there was "no sense as to the direction of the economy." A North Carolina-based furniture manufacturer said that weak demand for higher-priced lines contributed to an 8-percent reduction in new orders at his firm in August. In contrast, a manufacturer of packaging supplies in South Carolina told us that business picked up in August and he expected shipments to be strong during the next six months. In general, District manufacturers reported little new hiring and only modest wage increases since our last report. Prices in the manufacturing sector rose at less than a 1-percent annual rate in August.
District loan officers reported that lending activity rose at a moderate pace in July and August. Residential mortgage lending picked up appreciably as lower mortgage rates spurred additional refinancing activity. Refinancings accounted for 70 to 80 percent of some bankers' lending in August. A mortgage lender in Charleston, S.C., reported that loan demand had been exceptionally strong in recent weeks but he expected refinancing activity to slow in the fourth quarter. Commercial lending continued to be weak as many businesses remained cautious about taking on more debt in the sluggish economic environment. A banker in Virginia noted a pickup in borrowing by businesses providing security services, but said that overall commercial demand remained generally weak. A Charleston, W.V., banker noted that even though his local economy had been surprisingly resilient, businesses there remained "cautious" about borrowing for expansion.
District residential real estate agents continued to report strong sales in late July and August. A realtor in the Washington, D.C., area said home sales had been "tremendous" in recent weeks. He noted that while the market for higher priced homes had softened somewhat, low- to moderate-priced homes were "absolutely gone" as soon as they came on the market. Likewise, a contact in Maryland said home sales in her area were very strong and a realtor in Virginia Beach, Va., said that the market there was "hot." A homebuilder in the Carolinas described home sales as "skyrocketing," particularly in the Charlotte area. Most realtors cited low mortgage interest rates as the driving force behind the solid sales results. Stock market declines were also said to be a factor--a contact in Virginia Beach commented that some investors "burned" in the stock market were finding a safer investment in real estate.
According to commercial realtors, leasing and construction activity in the Fifth District remained generally flat in recent weeks. Many brokers attributed the market's inertia to seasonal factors--a contact in Washington, D.C., noted that "potential customers were focusing on vacations, not deals." By sector, demand was weak for office and industrial space, but interest in retail space edged higher--a Columbia, S.C., realtor reported that "high-end retail establishments" continued to perform well. Vacancy rates stabilized in the retail sector, but continued to creep up in the office and industrial sectors. Commercial rental rates changed little, but contacts in the Carolinas and Northern Virginia reported the re-emergence of landlord concessions in the office and industrial sectors.
Tourist activity was mixed since our last report. Hoteliers at Virginia Beach, Va., and Myrtle Beach, S.C., told us that bookings for the Labor Day weekend were somewhat higher than a year ago. However, a contact on the Outer Banks of North Carolina reported that business was a little softer than during Labor Day weekend last year. She attributed weaker bookings to an inundation of mosquitoes and jellyfish in the area. She also noted that tourists were not dining out as much, reducing revenues at area restaurants. Looking ahead, a respondent in Myrtle Beach expected tourist activity to be somewhat weaker in coming months, in part because of fewer flights into the area as financially strapped airlines trimmed costs.
Contacts at temporary employment agencies reported that the demand for workers firmed somewhat in recent weeks. An agent in Raleigh, N.C., reported that a few of his clients were "finally willing to launch new projects" due in part to having somewhat more confidence in the economy. He also reported seeing an increase in direct-placement requests at his agency. A Charlotte, N.C., agent reported stronger demand for workers and the agent expected the economy to improve in coming months. Sales and customer service representatives were the most highly sought after job categories in recent weeks.
Drought conditions persisted in most areas of the Fifth District in July and August. Despite widespread rainfall at the end of August, soaring temperatures and depleted ground moisture reduced potential crop yields--particularly in South Carolina, where over 80 percent of the corn crop and 60 percent of the soybean crop were reported to be in poor condition. Drought-stricken North Carolina continued to suffer and soybean development was delayed there. Pasture conditions continued to decline and farmers in Virginia and West Virginia reported early feeding of hay and hauling water to livestock. In addition, cattle farmers in North Carolina and Virginia were culling their herds to avoid possible feed shortages this fall and winter.