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Economic activity in the Fifth District continued to expand at a modest pace in June and July. Manufacturing activity grew at a somewhat slower pace in the last six weeks, while services firms' revenues were generally flat. In retail, sales edged higher although shopper traffic remained light. Home sales were strong in most areas, as mortgage interest rates remained attractive to homebuyers. The volume of mortgage lending grew modestly and the demand for commercial loans picked up. Evidence of price inflation remained scant. On District farms, a severe drought continued to stress crops and, in some areas, farmers were culling cattle as pasture conditions deteriorated.
Most District retailers reported modestly higher sales in recent weeks. Factory rebates and financing incentives bolstered automobile sales. In addition, building materials suppliers saw an uptick in sales, surprising some of our contacts. Department stores and big-box retail sales grew at or slightly ahead of the pace noted in our last report, and some stores began hiring additional workers in anticipation of stronger sales ahead. A contact with an upscale department store chain said that because of good sales prospects they were opening a new store in the Washington area in August and would hire 200 people.
Services firms reported that demand was flat in June and July. Several contacts characterized their customers as having a "wait and see" attitude due to the recent stock market slide, apprehension about terrorism, and concerns about additional corporate accounting scandals. Despite customers' concerns, some District services businesses saw a pickup in demand. Airports in Virginia said air travel had increased, a fitness center in Charlotte, N.C. said memberships were up, and a conference center in Rock Hill, S.C. said they were getting more calls and bookings. While current demand was mixed, firms remained optimistic about their prospects. Services firms added employees in June and July, as many looked for a pickup in demand in the months ahead. Prices in the services sector continued to rise at a moderate pace.
District manufacturing activity generally expanded since our last report, although at a more moderate and uneven pace. Shipments and new orders rose sharply at tobacco and paper manufacturing facilities. A South Carolina paper producer said that because orders were stronger in June, his plant increased its payroll and was working employees overtime. But contacts in the furniture and textiles industries reported that their demand softened, in part because of diminished consumer confidence. Even though overall employment in the District's manufacturing sector slipped in recent weeks and the average workweek edged lower, manufacturers continued to indicate that they would increase their payrolls over the next six months. Manufacturers continued to report modest increases in product prices.
District loan officers said that lending activity rose only modestly in the weeks since our last report. Residential mortgage lenders reported that low interest rates continued to support mortgage demand at a high level. A banker in Greenville, S.C., said that attractive interest rates had caused "fence sitters" to move ahead with securing mortgages for new home purchases, as well as leading homeowners to refinance existing mortgages. He also reported an increase in home remodeling loans. Commercial lenders reported that the demand for business loans was somewhat higher in recent weeks, but they noted that the level of activity remained generally weak. Several commercial lenders suggested that businesses' concerns about corporate accounting practices and stock market declines had slowed their local economies. A banker in Richmond, Va., however, noted that some clients' projects--on hold since September 11th--were starting to move ahead. She also noted more lending to municipalities struggling with revenue shortfalls.
Residential real estate activity remained generally upbeat in recent weeks. A Washington, D.C., realtor said that housing sales continued to be strong and that sellers were generally receiving more than their listing price when properties sold. An agent in Lutherville, Md., also reported strong home sales, but noted that the month-to-month sales figures were a little more erratic than earlier in the year. A number of contacts reported that sales of higher-priced homes had slowed--a realtor in Columbia, S.C., characterized this segment of the market as "dead in the water" in that area. While some realtors said that weakness in the higher-priced market segment stemmed in part from a loss of wealth in the stock market, others believed that stock market reversals had bolstered real estate sales. A Fredericksburg, Va., realtor said that lousy returns on stock market investments had caused some people to "bail out" of stocks and into real estate. A Richmond, Va., realtor added that people simply felt safer investing in real estate than in the stock market right now.
Fifth District commercial leasing and construction activity changed little since our last report. Realtors attributed the sluggishness of commercial activity to ongoing uncertainty over economic prospects. The office sector was particularly stagnant in recent weeks. A contact in Columbia, S.C., noted that despite lease renewals by many firms, absorption rates have not increased in that area. Activity in the industrial sector was also generally flat--but the level of activity varied by space type and location. A Northern Virginia industrial broker reported that traditional warehouse space continued to generate more interest than "flex space"--an office-industrial hybrid. Retail sector activity was mostly subdued across most of the Fifth District, but pockets of strength were recorded in Virginia and South Carolina. Rental rates and vacancy rates generally stabilized across the retail and industrial sectors, but weakened somewhat in the office sector.
District tourist activity strengthened further in recent weeks. Along the coast, hoteliers at Virginia Beach, the Outer Banks of North Carolina, and Myrtle Beach, S.C., reported that their bookings over the Fourth of July holiday were somewhat stronger than a year ago. A contact on the Outer Banks told us that construction of a large number of rental homes in the area had resulted in substantial rent discounting. A respondent in Virginia Beach reported that bookings for September and October were below the year ago level.
Temporary employment agencies across the District continued to report stronger demand for workers in recent weeks. Most contacts said that administrative and production workers were in particularly high demand, though they noted a trend toward shorter contract periods. Wages for temporary employees were little changed.
Persistent drought conditions severely stressed crops and pastures in many areas of the District in recent months. Virginia and North Carolina suffered through severe drought conditions; the governor of North Carolina has proposed that 54 counties in the state be declared disaster areas. Corn and soybean crops in the District have been particularly hard hit by dry conditions--over two-thirds of the corn crop in South Carolina was in poor to very poor condition. In addition, cattle farmers in North Carolina and Virginia reportedly culled livestock and hauled water due to poor pasture conditions and decreasing water supplies.