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Federal Reserve Districts

Fifth District - Richmond

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Fifth District economic activity was mixed from late November through early January. Declines in manufacturing output and retail sales accompanied moderate growth in service firms' revenues. Manufacturers reported substantially lower shipments and new orders in December, and a snowstorm in early January caused some manufacturers to curtail their operations for a day or two. Nevertheless, manufacturers remained optimistic about their prospects for the next six months. In retail, holiday sales were slightly below year-ago levels and retailers said that unusually large price discounts were needed to move merchandise. Stronger conditions emerged in the service sector as revenues at services firms rose solidly in December. In real estate, residential and commercial realtors reported little change in sales and leasing activity, while bankers said that higher interest rates damped residential mortgage refinancings. Employment continued to fall at District factories in December, but temporary employment agencies reported somewhat stronger demand for most categories of workers. In agriculture, rain and snow in recent weeks helped replenish depleted soil moisture levels and improved the conditions of small grain crops.

Seasonally-adjusted retail sales were moderately lower and shopper traffic was relatively light in District stores since our last report. Contacts at hardware and building supply stores in Richmond, Va., and Columbia, S.C., for example, said that sales were subdued. A big-box retailer in the Tidewater area of Virginia experienced flat revenues, and sales were slightly lower for a discounter in southeastern West Virginia. A manager at an upscale department store with locations throughout the District said weak demand led them to lower merchandise orders in an attempt to reduce inventories. Holiday price discounting was intense. A contact at a large Charleston, S.C., department store reported that unusually large discounts were necessary during the holidays to entice customers to buy. Big-ticket sales were flat in November and December and automobile sales were mixed as manufacturers' incentives trailed off.

Demand picked up for many District services firms in November and December. A contact at a catering firm in Charleston, W.V., said a solid local economy resulted in strong holiday business and higher orders for the coming year, while a West Virginia-based web designer reported stepped-up demand for his services. A fundraising firm in Charlotte, N.C., described increased success in raising money for the arts and other local charitable organizations. Additionally, businesses that offer security and other anti-terrorism related services cited a pickup in demand. Healthcare industry contacts reported generally steady demand for their services, but two North Carolina contacts said they were seeing increased competition for nurses, with bonus offers and "wage wars" common.

Activity in the manufacturing sector continued to contract in December and early January. Compared to prior months, shipments declined at a faster pace although new orders fell at a somewhat slower rate. Textile manufacturers reported generally weak demand for their products and continued intense competition from foreign producers. Additional bankruptcies were reported, most notably by a large textile firm headquartered in Greensboro, N.C. Chemical and primary metal manufacturers reported declines both in their shipments and new orders in December. In early January, a winter storm disrupted manufacturing activity. A number of manufacturing plants shut down operations for one or two days and some plants could not ship products or receive raw materials because of the poor road conditions. Most of these manufacturers, however, indicated that lost output was made up within several days, although overtime pay and additional utilities expenses were incurred in some instances. Both manufacturing employment and the average workweek declined in December, while wages rose modestly and prices were mostly flat.

In spite of the recent softening in activity, Fifth District manufacturers were more optimistic regarding their prospects for the first half of 2002. Respondents anticipated that shipments, new orders, and capital expenditures would increase substantially by mid-year.

District loan officers reported that since our last report, higher mortgage interest rates constrained residential lending, while weak demand continued to hamper commercial lending. Residential mortgage lenders noted that refinancing activity fell steeply in December, although loans for house purchases have been resilient in most areas of the District. Commercial lenders said that many of their clients had curtailed business expansion plans and were waiting for a turnaround in their businesses before committing to further borrowing. A Richmond, Va., banker said that lending activity was focused on loans "already in the pipeline," rather than new loans initiated in recent weeks. Several commercial lenders, however, said that they expected a pickup in lending activity by the second quarter of 2002 since many of their clients expected healthier business growth by that time.

Real Estate
Residential realtors and homebuilders reported little change in home sales since our last report. Several contacts noted that sales of higher-priced homes slowed while sales of moderately-priced homes held steady. A realtor in Greensboro, N.C., noted a decline in sales of upper-end homes in that area and said that job insecurity in the wake of the bankruptcy filing by a local textile firm was still depressing the housing market. But a brighter note was sounded by a realtor in southern Maryland who said that sales activity across all price ranges had increased "incredibly" in recent weeks. His agency was so busy on New Year's Eve that he wondered why prospective clients were calling him and not "out partying." Several homebuilders in North Carolina reported lower lumber prices, but construction labor costs were generally stable.

Commercial realtors across the District reported little change in leasing and construction activity in recent weeks. Leasing activity in the office and industrial sectors remained subdued, while the leasing of retail space increased only slightly. Rents continued to move lower for the office and industrial markets, but stabilized in the retail market--a realtor in Greensboro, N.C., described current rent levels as "more realistic." Vacancy rates across all sectors continued to rise, but at a slower pace in recent months. New construction activity was generally flat across the District.

Tourism activity was mixed in December and early January. Contacts at several District ski resorts reported that the ski season opened about three weeks behind schedule due to an unseasonably warm December. A manager at a ski resort in Virginia said that bookings were down about 50 percent from last year. He noted, however, that patronage picked up considerably during the week between Christmas and New Year's Day. A contact at a West Virginia ski resort told us that advance reservations were also trending higher, in part because of colder weather and lower gasoline prices. Tourism in coastal areas was somewhat stronger than we last reported. A contact on the Outer Banks of North Carolina noted that concerns with airline safety had boosted tourism in the area.

Temporary Employment
Contacts at temporary employment agencies reported somewhat stronger demand for workers since our last report. Demand was notably higher for light industrial and warehouse workers and for call center employees. Most temporary agency managers reported little change in wages, although a Rockville, Md., agent noted that, in order to get work, some temporary employees were willing to accept slightly lower wages. A number of contacts said they expected demand for temporary workers to pick up over the next six months, in part because some clients were now moving ahead with projects that had been put on hold.

The dry weather that had persisted in recent months ended in December as rain showers fell across most of the District. In addition, a snowstorm moved up the East Coast in early January, covering much of the Fifth District with sleet and snow. The much-needed precipitation boosted small grain conditions and helped restore soil moisture levels in deteriorating pastures. With the 2001 harvests complete, District agricultural bankers say that bumper crops helped the financial condition of many farm customers, but they noted that low crop prices continue to leave some financially vulnerable.

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Last update: January 16, 2002