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Fifth District economic activity expanded at a somewhat quicker pace since our last report, as a pickup in manufacturing activity outweighed softening in housing and retail activity. District manufacturers said that shipments and new orders rose briskly in March and early April, and that factory employment grew moderately. District services businesses also reported solid revenue gains and higher employment. Retail sales remained soft, however, and employment in the sector continued to slip. District real estate contacts reported continued strength in commercial leasing activity in recent weeks but said that home sales slowed and that home price appreciation moderated in some areas. In the financial sector, growth in both residential and commercial real estate lending slowed. Business contacts generally reported that price increases for goods and services remained moderate since our last report. In agriculture, unusually dry weather depleted soil moisture and slowed crop development, though recent rainfall offered some relief.
Service-producing firms reported solid growth in revenues since our last report. The increases were widespread across industries: architectural and engineering firms, hospitals and health care centers, and hotels and restaurants were among the types of organizations reporting solid growth. After pausing in March, services hiring picked up the pace in April, and wages continued to rise briskly. Shortages of nurses and truck drivers were reported in some communities--contacts reported offering substantially higher wages to attract applicants. Price growth in the services sector edged up since our last report, though increases remained modest. Looking ahead, respondents expected somewhat higher price increases in the months ahead.
District retailers continued to report sluggish sales in March and the first half of April. Contacts at apparel stores in Maryland and West Virginia said their sales pace softened. Among categories, sales were flat at grocery stores and grew less rapidly at big-box retailers, reportedly because higher gasoline prices caused some customers to trim their purchases. Automobile and light truck sales rose at dealerships in some areas in recent weeks, but sales of other big-ticket items remained generally lackluster. Retail employment softened in March and early April, with the latest readings suggesting that the softness is lessening. Retail prices rose more slowly in March and early April, and expectations of future increases waned.
District manufacturing activity strengthened considerably since our last report. Shipments, new orders, and capacity utilization rose briskly in March and the first half of April. Producers of electrical equipment, textiles and apparel, and tobacco products recorded the strongest gains in output. An electrical equipment manufacturer in South Carolina told us that increased demand from the Middle East lifted his sales in recent months. Consistent with stronger activity, manufacturers reported a pickup in hiring again after several months of modest payroll declines. Contacts said that the pace of growth in raw materials prices was little changed since our last report, while growth in final goods prices moderated. Some manufacturers noted difficulty in passing higher costs along to their customers--a North Carolina furniture manufacturer, for example, said that higher fuel surcharges on his raw materials were "eating into profits."
District bankers reported that lending activity grew more slowly in March and the first half of April. Some lenders said higher interest rates on home mortgages damped growth in home sales, while others told us that home price escalation trimmed demand and that "a large part of the population is now priced out of the market." District bankers said rising interest rates also slowed growth in commercial lending, though they noted that commercial lending for mergers and acquisitions activity and for construction of office buildings remained at high levels. A Richmond, Va., banker reported that private equity groups had "lots of money to invest" and were expected to boost merger and acquisition activity throughout 2006.
Residential real estate agents reported generally slower home sales and more moderate price growth in March and early April. A contact in Vienna, Va., said that housing markets remained healthy, but that sales were "softer." "Buyers are out there, but they won't make quick decisions," he noted. An agent in Virginia Beach, Va., similarly remarked: "People are thinking more before buying. They take more time to shop around now." In Washington, D.C., an agent said that the real estate market had slowed over the past several months, including less traffic at open houses. Contacts in some areas in the Fifth District noted that homes--particularly those in upper price ranges--were staying on the market longer. Real estate agents generally reported that home prices were no longer escalating at the rapid pace of 2005. A contact in Washington, D.C., said that many area home sellers were reducing asking prices: "It's clearly a buyers' market now and buyers can negotiate better prices," he noted.
Commercial real estate agents reported continued strength in leasing activity in most areas. An agent in Raleigh, N.C., said "it [leasing activity] has not been gangbusters, but it's been pretty steady." Agents reported that vacancy rates for office and retail space remained low and that demand continued to be strong. A contact in Prince William, Va., described a large office building that was just recently put on the market and was already half leased. District real estate agents said that commercial rents rose modestly since our last report. A Charlotte, N.C., agent mentioned that with vacancy rates so low, the increase in rents was "simply a matter of good old supply and demand." Little change in new construction was reported.
Tourism was mixed since our last report. A manager at a mountain resort in Virginia reported that his company had just completed a record-setting ski season and said that bookings for the Easter weekend were double those of a year ago. In contrast, contacts along coastal areas said that higher gasoline prices had hampered business there--a hotelier in Virginia Beach, Va., told us "bookings get slower as the price of gasoline gets higher." Higher gasoline prices, however, did not diminish attendance at the 94th annual National Cherry Blossom Festival in Washington, D.C. Approximately 1 million people showed up for the festival this year.
Temporary employment agencies generally reported stronger demand for workers in March and early April. An agent in Richmond, Va., said that the area's low unemployment rate had made it more difficult for companies to find qualified workers, boosting demand for temporary workers. Contacts in Washington, D.C., and Cary, N.C., reported that demand for temporary workers had been boosted by stronger economic growth in those areas. Employment agents noted that it had become harder to find workers and said that they would be raising wages over the next six months to attract more applicants.
Dry weather during much of March and early April depleted soil moisture and stressed pastures and crops in many areas of the District. Agricultural analysts said that pastureland in Virginia and the Carolinas was in generally poor condition due to the lack of rain. Hay and small grain development in Virginia was also slowed by the dry conditions. As for brighter notes, widespread rainfall was received in mid April, lessening concerns about dry conditions. In addition, spring planting of corn was ahead of schedule in most of the District and livestock were reported to be in good condition in Virginia and West Virginia.