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The Fifth District economy continued to expand at a moderate pace in the weeks since our last report. District services businesses reported somewhat faster growth in revenues and employment in both April and May. In retail, sales picked up markedly and store traffic increased sharply in May. Manufacturing also gained some traction; shipments and new orders rose at a more solid pace since our last report, though employment in the sector continued to drift lower. District real estate agents said that residential markets remained vibrant and that commercial leasing firmed in recent weeks. In the financial sector, lending picked up; residential mortgage lending was particularly strong as home sales remained hot in most areas. On the price front, business contacts said that the prices of most goods and services continued to rise only modestly. In agriculture, cooler-than-normal spring temperatures hampered planting activity in some areas, but crop conditions were generally good throughout the District.
Retail sales growth picked up in April and May. District retailers told us their stores were busier in recent weeks and they were expanding sales staff as a result. Sales at building supply stores were particularly strong and contacts reported that rising sales had prompted increased hiring. Although sales rose at a number of District big-ticket retailers, the gains were concentrated in men's apparel, sporting goods, and building supplies, rather than in automobiles and furniture. District retailers told us that prices continued to rise at an annual rate of less than 2 percent.
District services firms reported moderately higher revenues in recent weeks. Public utilities in South Carolina and West Virginia said unseasonably cool weather had prolonged the demand for heat through May. Several District healthcare services firms reported an increase in business. Contacts at hospitals and home healthcare businesses in eastern North Carolina and southwestern West Virginia said that stronger sales had led them to increase staffing. Employment in the services sector continued to rise only moderately although wage gains were larger than earlier in the year. Price increases at service-producing firms remained modest.
District manufacturing activity expanded at a slightly faster pace since our last report. Manufacturers said shipments grew more quickly, while new orders increased modestly and capacity utilization moved higher in April and May. Industrial machinery, paper, and transportation equipment manufacturers registered the strongest gains in output. Despite increased shipments, factory employment continued to decline, especially in the chemicals and furniture industries. A Carolina furniture manufacturer said that his shipments, new orders, and payroll fell in May and that retail furniture sales had declined nationwide. Raw materials prices rose at a quicker pace in recent weeks and a number of District manufacturers expressed concern about razor-thin profit margins. "Raw materials costs are escalating faster than we can pass them along to customers," lamented a North Carolina plastics manufacturer.
District bankers said demand for loans strengthened somewhat in April and May. Increased residential mortgage lending was spurred by continued robust home sales in many areas of the District; mortgage refinancings remained subdued. Real estate agents said that a growing number of clients expressed interest in purchasing a house for investment purposes or as a second home rather than as a primary residence. Mortgage interest rates drifted lower in April and May, dropping well below 6 percent for conventional 30 year mortgages. "Mortgage interest rates have fooled people, staying as low as they have. They've helped to sustain the market," noted a Richmond, Va., lender. Commercial lending was generally higher as well, bolstered by a pickup in merger and acquisition activity in some instances. But the pace of commercial lending slowed in a few areas. A Charlottesville, Va., banker said that his cold calls to solicit commercial loans had "gotten a lot colder" in recent weeks.
Residential real estate agents in the District generally reported stronger housing markets and rising home prices in recent weeks. In Richmond, Va., an agent reported "extremely" strong house sales, noting that listings at his agency were the highest they had ever been and that multiple offers for homes remained common. In Virginia Beach, Va., an agent said "everything is popping!" He said that sales across the board were great, noting that he had sold over $12 million in properties in ten days. Likewise, contacts in Fredericksburg, Va., and Washington, D.C., characterized markets as very strong. Both said, however, that sales of upper-price-range homes had slowed a bit. An agent in Greensboro, N.C., also experienced some slowing in sales of upper-end homes. Despite softer upper-end activity, sales prices continued to rise at a brisk pace in many areas of the District.
Commercial real estate agents reported a strong increase in Fifth District leasing activity in April and May. Contacts said that office and retail leasing accounted for the bulk of recent activity. In the Washington, D.C., market, demand for investment properties and lease space remained strong--one local agent summed up the environment by stating, "There are too many developers chasing too few sites and too much money chasing too few deals." Contacts in Raleigh, N.C., and Richmond, Va., said that commercial markets were "in a good place"--leasing strengthened in both areas. Commercial leasing also moved higher in Columbia, S.C., and contacts there noted with relief that military bases in the area had been spared in the most recent round of base closings. "If we had lost those bases then we could have just locked the doors and gone home," commented one agent. Commercial rents firmed throughout the District and new construction rose in many urban areas in April and May.
Tourism picked up a bit since our last report. Contacts at hotels along the District's coast noted that bookings for the Memorial Day weekend were somewhat stronger than a year ago. But not all contacts characterized tourism as strong. Several contacts along the coast said that they had to discount rooms substantially to attract vacationers, many of whom, they noted, were quite savvy at shopping for price discounts on the Internet. Tourism in Washington, D.C., continued to rise and hotel occupancy rates there have returned to pre-September 11 levels; surging demand for hotel rooms in the nation's capital has driven room rates sharply higher in recent months.
Contacts at employment agencies reported stronger demand for temporary workers in April and May. A Washington, D.C., agent told us that the local economy continued to improve, boosting demand for temporary workers and wages. The president of a staffing agency in Raleigh, N.C., said that many local companies were searching for permanent employees, and he expected wider use of his firm's "temp-to-hire" option, which allows companies to hire an employee on a permanent basis after a 13-week trial period.
Cooler-than-normal temperatures slowed the planting and development of selected District crops in recent weeks. Cantaloupe, tomato, and watermelon plantings were well behind schedule in Maryland, while plantings of peanuts and cotton were slightly behind in Virginia. Agricultural analysts characterized crop conditions as "fair to good" throughout the District, despite dry conditions in some areas of Virginia and the Carolinas. Small grain harvesting began in the Carolinas and, based on early estimates, yields were average.