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Fifth District economic growth moderated in the weeks since our last report. Weak auto sales and light customer traffic held back retail expansion, and service sector sales were off their earlier pace. Manufacturing growth eased in recent weeks, slowed in part by increased competition from Asian producers. Real estate and banking activity remained strong, but there were signs that growth may be leveling off. Workers remained in short supply across the District. Wage pressures picked up in the services sector but eased somewhat in retail and manufacturing. Prices of goods and services advanced at modest rates. In agriculture, Hurricane Bonnie brought much needed rainfall to farmland in some areas, but also caused widespread damage to crops in coastal areas of Virginia and the Carolinas.
Retail sales growth moderated in recent weeks as sales of big-ticket items fell and shopper traffic declined. Sales of most makes of automobiles declined sharply and General Motors dealers reported lower-than-normal inventories in the aftermath of the UAW strike. Retail employment changed little in August, and despite an easing of wage pressures, reports of higher wages to retain workers remained common. Looking forward, retailers did not expect the recent volatility in financial markets to trim their sales in coming months; in contrast, they remained optimistic regarding a pickup in activity.
Revenues at service-producing firms declined modestly in August. One contact who operates a language school in Virginia reported that "the demand from foreigners just hasn't been as strong as in the past." Service-sector employment edged lower in recent weeks although wages grew at a faster clip. Price growth, however, moderated somewhat in August. The outlook for the next six months remained upbeat suggesting that service providers may view their recent sales dip as temporary.
District manufacturing growth stalled in August following an unusually strong July. Although new orders grew slightly faster, shipments were flat. Producers of textiles and apparel, industrial machinery, and chemicals reported disappointing sales growth. Several textile manufacturers attributed softer sales to effects of the Asian financial crisis, and a producer of engineered plastic components for industrial machinery reported that "things are really dead now." Despite the return of General Motors workers, manufacturing employment in the District edged lower and wage growth moderated somewhat. Looking ahead, most contacts were less optimistic about business conditions in coming months, and they anticipated a sharp reduction in their capital expenditures.
Lending activity remained brisk throughout the District and competition among banks for commercial loans intensified in August. A Charleston, S.C., banker noted that an increasing number of banks were pursuing loan accounts in his area and remarked that "you can't walk around the block without bumping into these [new] guys." There were also more reports of bankers sweetening commercial loan terms in order to attract business and to "keep people from stealing current customers." A few residential mortgage lenders reported that loan demand tapered off in August, but they attributed the declines largely to the summer vacation season.
Residential real estate activity remained strong in recent weeks but the rate of expansion softened. Contacts reported that the Washington, D.C., Raleigh, N.C., and Charleston, S.C., markets remained particularly strong, while the Charlotte, N.C., market was said to be showing signs of slowing. Builders reported that sales of higher-priced homes and of vacation or second homes picked up. Most realtors told us that recent stock market fluctuations had not affected real estate activity in their areas so far; several, however, expressed concerns that continued declines could rattle consumer confidence.
Commercial real estate activity continued at a high level, although little growth was reported outside of West Virginia and South Carolina. Despite the overall sluggishness in the sector, the construction and leasing of retail properties continued to be more active in most areas. Several contacts, however, were cautious about future activity. A South Carolina realtor noted that the pace of acquisitions had slowed in his area and that institutional buyers were "backing away" from deals as their sources of money dried up. Similarly, a contact in the Washington, D.C., area said that some buyers
were "folding their tents" and that some capital was "fleeing" the real estate market in recent weeks.
Tourist activity was little changed in August despite the disruptions caused by two hurricanes. Many coastal hotels in the Carolinas closed for most of the last week in August in advance of Hurricane Bonnie. One contact on North Carolina's Outer Banks reported that business prior to the hurricanes had been much stronger than anticipated and that it could be one of his best years ever. In contrast, a hotelier in Myrtle Beach, S.C., said that business was "way off" because of Hurricane Bonnie, and that tourists had been scared away by the media build-up surrounding Hurricane Danielle. Looking ahead to coming months, District contacts expected tourist activity to match last fall's pace.
The demand for temporary workers from non-manufacturing firms remained strong in recent weeks. Programmers and administrative assistants with computer skills continued to be in critically short supply. In the manufacturing sector, however, increased uncertainty surrounding sales prospects reduced some producers' demand for contingent employees. Contacts reported that wages generally remained stable, but many expected sharp wage increases to be a "sure thing" during the next six months if labor markets tighten further.
Although coastal counties of North Carolina and Virginia received significant amounts of rainfall from Hurricane Bonnie, topsoil moisture in most areas of the District continued to be short to very short. Agricultural analysts reported that crop damage from the hurricane was "severe" in southeastern Virginia and resulted in 20 to 30 percent crop losses in coastal areas of South Carolina. Early estimates indicate that over 350,000 acres of crops sustained some level of damage in North Carolina.