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Federal Reserve Districts

Fifth District--Richmond

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Economic activity in the Fifth District grew modestly in January and the first three weeks of February, with a slight improvement in services and manufacturing conditions offsetting a listless retail sector. Services businesses reported generally steady to slightly higher demand, and some contacts cited higher orders for coming months. District manufacturing activity expanded somewhat faster, as shipments and new orders rose sharply in January and early February. In contrast, retail sales were little changed from our previous report, and retailers continued to trim payrolls. Price inflation remained modest according to contacts. In the real estate sector, District home sales rose at a solid rate, but commercial leasing activity slowed as war prospects unsettled potential lessees. In agriculture, unusually cold and snowy weather hampered field preparation and led to the abandonment of still-unharvested crops in some areas of the District.

District retailers reported generally flat sales over the past six weeks. A major winter storm over the Presidents Day weekend led many District businesses to close for a day, and lingering snow curtailed sales. According to a department store manager in Annapolis, Md., sales growth and customer traffic there had been unchanged in recent weeks. And in Richmond, Va., where the winter storm closed several malls, a contact said that store sales were off but that some of the slack might have been made up through increased Internet sales. A manager at a builders supply store told us even though customer traffic was lower because of the recent storm, his store experienced a run on duct tape and other items recommended for use in the event of domestic terrorism. In Virginia Beach, Va., retailers reported a slight decrease in customer traffic as military deployments continued in that area. Car dealers in Washington, D.C., and Charleston, W.Va., said business was very slow, with manufacturers incentives shoring up sales.

Most services businesses said customer demand was steady to slightly higher in January through late February, but firms that do business with the federal government reported decreased revenues. A contact at a financial services firm in Baltimore, Md., said business was stable and that there was less of a "negative feel" in the local economy. In West Virginia, a caterer said her bookings had been slow the past few weeks but noted that her calendar for late spring and summer was filling. Most firms indicated that their employment levels have been steady. An executive search firm in the District of Columbia said they have had to "market a little harder," and a health club also in District of Columbia, said they were seeing more clients. An engineering firm in Charlotte, N.C., reported a shortage of qualified, licensed engineers in the area but a glut of business managers.

District manufacturing activity strengthened in January and early February. Shipments and new orders rose sharply at District factories, led by a pickup in the chemicals, paper, and textiles industries. A textiles manufacturer in North Carolina told us that aggressive price reductions were enabling his company to gain market share. Furniture manufacturers noted that sales were strong in early January, although inclement weather later in the month tempered growth. Despite the recent uptick in demand, a number of manufacturers expressed concerns about rising oil prices and the possibility of war. A producer of plastic products in North Carolina told us, "Things are very uncertain now; business isn't getting any worse, but there will likely be no sign of a real pickup in activity until the Iraq situation is cleared up." A tire manufacturer in Virginia noted that 70 percent of his firm's raw materials were derived from oil. He said that the rising costs of oil and natural gas were pushing up the prices of raw materials but that he could not pass the higher costs through to his customers.

Contacts at District financial institutions said that loan demand changed little in January and February. Commercial lending remained weak, in part because of the uncertainty over Iraq, but there were some encouraging signs that demand for commercial loans may be ticking up. A banker in Charlottesville, Va., said that he had made a few more business loans in recent weeks and noted that some of his clients were beginning to expand business. In contrast, a lender in Richmond, Va., reported that commercial lending was "no better, no worse" than it was late last year and that her clients were "doing well to just keep from losing business." Residential mortgage lending remained strong as mortgage rates drifted lower, and most contacts said that the growth in mortgage lending matched December's pace. Residential refinancing continued strong, accounting for 60 percent to 75 percent of home mortgage lending in many cases. A mortgage lender in Richmond, Va., said that interest in refinancing was still strong, observing that "every 1/8 percent to 1/4 percent drop in mortgage rates brings in new people."

Real Estate
Residential realtors generally reported that home sales were solid in January and February. An agent in Greenville, S.C., said local sales were the best he had seen in forty years. He commented that sales were so good he was afraid to say too much "for fear of jinxing them." A realtor in Odenton, Md., also reported strong sales in January, adding that properties put on the market in her area did not last long. In Richmond, Va., an agent said that the remarkable string of monthly sales advances in that area remained intact. In a less rosy assessment, real estate agents in the District of Columbia said sales had been somewhat slower in recent weeks--in part because of inclement weather in the region. Across the District, homes in the low-to-middle price range were selling best, but a few realtors said that interest in higher price homes was picking up. Home prices were reported to be rising modestly in most locations.

Commercial realtors reported slower growth in leasing activity in recent weeks as potential lessees in the office sector adopted a "wait and see" attitude in light of political developments internationally. A realtor in Raleigh, N.C., captured the mood of many with the observation that "people are just waiting on the sidelines." The leasing of retail space picked up--a realtor in Richmond, Va., for example, experienced "very high" growth over the past six weeks in retail leasing. But office and industrial space leasing was sluggish. Vacancy rates for retail space remained low, while office vacancy rates edged higher. Rents for retail space held firm, but edged lower for office space. Realtors in Washington, D.C. and Charlotte, N.C., noted that some tenants had recently renegotiated their leases, obtaining lower rents and other concessions. New commercial construction was generally flat across sectors--several realtors in the Carolinas reported a shift to refurbishing older buildings in lieu of building new ones.

Tourist activity strengthened since our last report. Contacts at several District ski resorts told us that abundant snow in February rejuvenated interest in skiing. They noted that bookings over the Presidents Day weekend were much higher than last year and predicted that the ski season would be extended through late March. Coastal tourism was also reported to be stronger. A contact from Myrtle Beach, S.C., said that Presidents Day weekend had been extremely busy, adding that it was difficult to get into a local restaurant without a reservation. Looking ahead, contacts expressed concern that rising gas prices and continued talk of war could hamper the spring tourist season.

Temporary Employment
Contacts at District temporary employment agencies reported lukewarm demand for workers in recent weeks. An agent in Washington, D.C., reported that he had expected a better start to the new year but said, " Business is still very soft, and demand for extra workers is slower than expected." While overall demand for temporary workers was flat, continued strong residential mortgage lending resulted in higher demand for temporary workers in that sector. In addition, there were scattered reports of a pickup in hiring in manufacturing.

Frigid weather in January and heavy snowfall in early February impeded field preparation and limited late small-grain plantings in much of the District. Farmers in Maryland, North Carolina, and Virginia abandoned some remaining corn and soybean fields in January because of the cold weather and anticipated poor yields. The cold weather also curtailed development of pastures and winter grazing crops--farmers were feeding livestock full time and trying to stretch hay supplies. Although some areas in South Carolina continued to experience moderate drought conditions, contacts in most areas of the state reported that small-grain crops were in good condition.

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Last update: March 5, 2003