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Economic growth in the Fifth District generally continued at a strong pace in late April and May, although scattered signs of slowing were more in evidence. Activity in the residential real estate and banking sectors expanded at a more modest rate in recent weeks, in part because of higher interest rates. In contrast, revenue growth at services firms picked up in April and May and retail sales rose at a solid clip in the last several weeks. Moreover, manufacturing activity remained relatively strong; new orders rebounded from a spring lull and shipments growth picked up. In labor markets, new workers continued to be hard to find, and wages increased moderately. Prices of manufactured goods rose at a slightly faster rate in May, while price growth eased in the retail and services sectors.
District retail activity continued to advance at a brisk pace since our last report. Shopper traffic picked up in May and retailers were more optimistic regarding product demand over the next six months. Big-ticket sales were somewhat flat, however. An automobile dealer in the Research Triangle area of North Carolina noted that customer traffic in showrooms had fallen off, and that sales in the region had dropped about 15 percent compared to a year ago. An apparel retailer in West Virginia also reported a sales decline, due in part to a loss of mining jobs in the region. Wages in the retail sector advanced at a somewhat faster rate in May.
Growth in services revenues picked up in recent weeks and moderate employment growth continued in the sector. Demand for services workers remained strong as District employers increasingly turned to foreign workers with short-term work visas to fill positions in landscaping, housekeeping services, and other seasonal or temporary positions. Strong demand for entry-level workers was said to be driving up wages at fast food restaurants. A contact in the Tidewater area of Virginia reported that fast food restaurants were offering as much as $8.00 per hour to attract employees--well above minimum wage.
District manufacturing activity advanced at a moderate rate in late April and May as growth in new orders rebounded. Manufacturing shipments grew at a solid pace; growth was particularly strong at tobacco, lumber, paper, and industrial machinery producers. On the employment front, job growth remained modest, in part because of a continued shortage of qualified workers in some areas. A manager at an industrial machinery plant in Maryland, for example, noted that "low unemployment makes hiring qualified individuals quite difficult--we have chosen continued use of overtime instead." Manufacturing wages rose at a quicker pace in both April and May, and raw materials prices trended moderately higher since our last report, largely reflecting higher oil and stainless steel prices.
District bankers reported that growth in lending activity slowed in recent weeks as interest rates moved higher. Most bankers we spoke with said that while their local economies remained vibrant, commercial lending activity was losing steam. Our contacts characterized new residential mortgage lending as sluggish and they noted that refinancings dropped markedly. Lenders expressed growing concern that higher interest rates would reduce lending activity further; a Charleston, S.C., banker captured the sentiment of several bankers, noting that he was "waiting nervously to see what will happen next." Lenders generally indicated that their credit standards changed little in recent weeks; nevertheless, several lenders described increased efforts to market loans to individuals with marginal credit ratings.
Residential realtors began to see a slight cooling of home sales and customer traffic through model homes in May. While home sales in the District of Columbia were said to be at normal seasonal levels, realtors reported that home sales outside the city's beltway slowed, especially those to first-time homebuyers. Homebuilders in Greensboro, N.C., reported a decline in building permits, and realtors there said home sales were softer across all price ranges. Sales of upper-end homes were characterized as strong in some areas of Myrtle Beach, S.C., but were said to have slowed in the Tidewater area of Virginia, and in eastern North Carolina. New homes sales were also reported to be down in West Virginia, where there was scattered evidence that materials shortages were easing. A homebuilder near Charleston, W.V., for example, noted that he could now get same-day delivery of materials from his lumberyard; a year ago such deliveries were taking up to three days.
Commercial realtors in the Fifth District reported generally strong markets, although some signs of slowing in the pace of activity were emerging. Realtors in Maryland and the District of Columbia said that office rental rates were rising as supplies of available Class A office and industrial space tightened. One realtor noted that it was "clearly a landlords' market" in the area. Contacts in Northern Virginia said an inflow of telecommunications and "dotcom" businesses continue to absorb large blocks of office space and they indicated that the hotel market there was also very strong. In contrast, commercial real estate activity in the suburbs of Richmond, Va., was described as somewhat slower, although the level of activity there continued to be high. Commercial vacancy rates and rental rates were reported to be stable in Raleigh, N.C., but one realtor noted an "air of caution" about prospects for new construction in the area. In Charlotte, N.C., new industrial and manufacturing construction activity was said to be slowing, while office development picked up.
Tourist activity remained strong in recent weeks despite a wet Memorial Day weekend. A manager of five hotels in the Virginia Beach area told us that tourist activity had increased overall in May despite the Memorial Day weekend washout. A hotelier on the Outer Banks of North Carolina said that while rainy weather caused some tourists to check out early, attendance at the reopening of the Cape Hatteras Lighthouse and at a huge fishing tournament offset vacationers put off by rainy weather. Clement holiday weather prevailed in Myrtle Beach, S.C., and several contacts there reported being completely booked for the weekend.
Demand for temporary workers remained strong in most areas of the District. Contacts at temporary employment agencies attributed the strength to the robust economy and to the difficulty of finding permanent workers. Warehouse and factory production workers remained in short supply as did workers with administrative and computer skills. A contact in Richmond, Va., reported an urgent need for administrative assistants with word processing and data entry skills, but noted that she would gladly settle for people who were simply "reliable." Workers placed by agencies on a temporary basis were being increasingly hired by companies for permanent positions, making it more difficult for agencies to maintain an adequate pool of employees for temporary work assignments. Contacts at employment agencies indicated that wages continued to advance at a moderate rate.
With the exception of South Carolina, District states received abundant rain in recent weeks and topsoil moisture levels improved. Cotton, peanut, and soybean planting generally progressed on schedule in Virginia and North Carolina. However, dry conditions persisted in South Carolina and farmers in some areas of that state halted the planting of cotton and soybeans until soil moisture conditions improve. The lack of rain in South Carolina also led to deterioration in pasture conditions and some farmers were considering culling their herds because of the shortage of forage stocks.