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Federal Reserve Districts

Fifth District--Richmond

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Economic activity in the Fifth District continued to grow at a slow pace since our last report, with the performance of individual sectors mixed. Manufacturing activity posted modest growth, with new orders increasing somewhat and shipments declining slightly. Retailers said that while overall sales remained sluggish, big-ticket sales weakened further. Services firms generally reported moderately faster growth in revenues. Housing markets cooled further in most, but not all, localities. While current commercial real estate activity was spotty, there were hints of firming demand. District labor markets remained solid, with businesses hiring and spot reports of skilled-worker shortages continuing. Prices generally increased modestly, and contacts noted some pullbacks in energy and building materials prices. In addition, businesses indicated that it was more difficult to pass higher input prices through to customers. In agriculture, hot and dry conditions stressed crops and led to concerns about water supplies in some areas.

District retailers reported generally sluggish retail sales, with continued weakness in big ticket sales offsetting steady activity in other categories. On a positive note, a sales tax holiday boosted back-to-school sales in Virginia. However, a big-box retail contact indicated that higher gasoline prices continued to cut into the budget of many of his customers, contributing to a small decline in same-store sales. Sales were lower at a building supply chain as housing construction cooled. Car and light truck sales were generally softer. An automobile dealer in northeastern West Virginia said that buyers have become more cautious and that he had reduced his inventory in line with lower sales expectations. Retail employment was unchanged among many of our contacts, although some department stores increased their ratio of regular part-time to full-time workers. Retail price growth edged up slightly, though not in all categories. A contact in the Washington, D.C., area said that a falloff in new residential construction lowered prices of lumber and plywood in recent weeks.

Revenue growth at service-producing firms generally picked up in recent weeks. Despite recently heightened security concerns, airports reported that their revenues grew more quickly. Air conditioning contractors also noted strong demand for their services as temperatures remained above normal. Contacts at several District hospitals and healthcare systems reported solid consumer demand, but said they are bracing for an expected round of reimbursement cuts from Medicare. In contrast, architects said their billings flattened as the market for new homes slowed. The pace of hiring in the services sector stepped up, while services price growth moderated since our last report.

Manufacturing activity expanded at a slower pace since our last report. Manufacturers told us that shipments declined, while new orders increased modestly and employment moved higher. Among industries, producers of apparel, fabricated metals, food, furniture, and lumber recorded declines in output from mid July through late August. A machinery manufacturer in North Carolina reported stronger orders, though a residential door producer in the state said that his orders had softened. A number of respondents indicated that while raw materials prices were increasing less rapidly, they could no longer pass through those increases.

District bankers reported little change in lending activity since our last report. Contacts said that commercial lending was flat. A Charlotte, N.C., banker suggested that the demand for commercial loans may have peaked, and could begin to slow. Lenders reported that they have to work extra hard for business. "We've had to beat the bushes just to get what [business] we're getting," said one contact. Bankers across the District noted that mortgage lending also continued to be soft. However, some contacts noted an increase in refinancing activity, with some customers switching from variable rate loans to fixed rate loans to protect against future interest rate increases.

Real Estate
Residential real estate agents reported additional signs of cooling in many District housing markets. In Asheville and Charlotte, N.C., agents told us that some clients moving into their areas were unable to complete home purchases there because they could not sell their existing homes located in other parts of the country. A Washington, D.C., agent reported "incredibly slow" sales, especially for new construction and condominiums, adding that his inventory had more than doubled from year-ago levels. But not all markets were slower. A Realtor in Greenville, S.C., reported that area sales were up 14 percent over year-ago levels. In addition, contacts in Richmond, Va., and in Greensboro, N.C., told us that while August was typically slow due to schools starting, their housing markets remained busy. In many markets across the District, home prices declined modestly. But a Richmond, Va., Realtor reported some price appreciation in mid range homes, although he added that there was a "dramatic slowdown" in the prices of higher bracket homes. In addition, an agent in Asheville, N.C., reported steadily rising home prices, with increases of 10 to 12 percent over year-ago levels.

Commercial real estate agents across the District reported little overall change in leasing activity since our last report. An agent in Manassas, Va., for example, noted that while office leasing had slowed significantly, retail and industrial leasing continued to be very strong due to rapid population growth of the area. Agents noted that commercial rental rates appear to be firming. A Raleigh, N.C., agent said that "it is still a tenant's market, but it is becoming increasingly better for the landlord." Little change was reported in vacancy rates and new construction activity.

Tourist activity was generally mixed in August. Contacts along the coast generally reported firmer bookings since our last report, helped by good weather and increased short-term stays. In addition, a manager at a mountain resort in Virginia said that time-share sales were doing extremely well--up 20 percent over last year. In contrast, a counterpart in West Virginia indicated somewhat weaker bookings compared to a year ago, which she attributed in part to higher gasoline prices.

Temporary Employment
Temporary employment agents reported generally strong demand for workers since our last report. In Richmond, Va., an agent was optimistic that demand would remain solid as companies were increasingly relying on temporary workers. An agent in Raleigh, N.C., reported ongoing demand for full-time workers, but added that skilled workers remained hard to find. In contrast, some softening in demand for temporary workers was reported by an agent in the Washington, D.C., area. Employees with skills in computers, sales, production, warehouse, and life sciences were highly sought by employers. Increasingly, employers also were looking for bilingual employees.

Hot, dry weather in late July and August depleted soil moisture and hindered crop development in many areas of the District. Excessive heat and dry field conditions in Maryland and Virginia stressed soybeans and hindered corn development. In those areas, pasture conditions also deteriorated. Moreover, farmers in Virginia were concerned about adequate water supplies for their livestock. In contrast, cattle herds and pastures were reported to be in mostly good condition in West Virginia. Despite hot and dry weather, corn and soybeans progressed well in North Carolina, and the peach harvest was ahead of schedule in South Carolina.

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Last update: September 6, 2006