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The Fifth District economy continued to expand at a solid pace in late July and August. District services businesses reported steady revenue gains and moderately higher employment during the period. Retail sales growth was brisk, boosted again by exceptionally strong automobile and light truck sales. Manufacturing output grew modestly and factory employment increased for the first time since last February. District real estate agents said that though commercial and residential real estate markets remained generally strong, home sales decelerated in a few localities. In the financial sector, bank lending rose at a more moderate pace as growth in residential mortgage lending eased. On the price front, higher oil and natural gas prices drove materials costs up for homebuilders and manufacturers, but prices for most goods and services continued to rise at only a moderate pace. In agriculture, crops and livestock were reported to be in good condition, despite very hot and dry weather in August.
Retail sales grew at a brisk pace in the weeks since our last report, but retailers expected high energy prices would trim consumer demand over the next six months. Automobile and light truck dealers chalked up record sales in July and August as "employee pricing" and other incentive programs drew customers to showrooms. In addition, a big-box retailer with stores across the District said summer sales figures were the best in several years. But not all signs were positive. Several contacts said that sharply higher energy prices were beginning to constrain consumer behavior, and they expected that continued high prices would weaken demand in coming months. A District automobile dealer, for example, told us he had sold SUVs recently to customers who exchanged them within a few days for smaller, more fuel efficient vehicles. Despite higher gasoline prices, overall price growth in the retail sector remained modest.
Contacts at District services firms reported continued solid growth in revenues in recent weeks. Professional, scientific, and technical firms reported that their revenues had either remained on pace or accelerated, and that they expected stronger demand during the next few months. Many contacts said higher energy prices were having little effect on their businesses, though a North Carolina trucking executive noted that his firm would increase shipping rates if gasoline prices rose further, which he said could slow demand. Employment and wages rose at a somewhat quicker pace, and prices in the sector increased only modestly in August.
District manufacturing activity moved modestly higher in August after edging lower in June and July. Manufacturers told us that shipments rose at a faster pace in August and that factory employment expanded for the first time in six months. Producers in the electrical equipment, industrial machinery, and printing industries recorded the strongest gains in output during the month, but a variety of manufacturers reported that their shipments strengthened. A plastics producer in South Carolina noted, "We have had an excellent month [August] and look forward to the rest of this year." A North Carolina boat manufacturer told us, "Business in general is good and more expensive boats are selling." Raw materials costs increased in August--prices of petroleum-based products and steel, in particular, rose sharply--and an increasing number of manufacturers voiced concern that their profit margins were being squeezed because they could no longer pass along price increases to customers.
District loan officers said that lending activity rose at a more moderate pace in late July and August as residential mortgage lending grew less rapidly. Rising mortgage interest rates and rapidly escalating home prices weighed on home sales and mortgage lending activity in some areas. A mortgage lender in Charleston, S.C., said that while lending remained strong there, rising interest rates were beginning to pare growth. In Charlotte, N.C., a contact reported that demand had slowed both because interest rates rose and because more people were being "priced out of the market." District bankers generally reported little change in commercial lending during August. A Charlottesville, Va., lender told us that demand for commercial loans had flattened, noting that new lending was just "replenishing the runoff [of business] to competitors." Several contacts said they expected commercial loan volumes to pick up in the fall, as there was business "in the pipeline." Credit quality remained good.
Residential real estate agents reported that while housing activity remained generally strong across the District in July and August, demand cooled in some localities and for upscale homes. An agent in Odenton, Md., said multiple offers on homes for sale were still common, but that houses selling in excess of one million dollars were staying on the market somewhat longer. A contact in Greenville, S.C., reported that the area's housing market remained very strong, with sales of mid-priced homes strong, though sales of larger homes were starting to languish. In Virginia Beach, Va., an agent said that while houses in all price ranges were selling well, a recent rise in mortgage rates was slowing sales "a little bit." Home prices continued to rise in most areas, as did construction costs. Builders in Charlotte, and Winston Salem, N.C., told us that materials costs increased substantially in August--particularly petroleum-based products such as roofing material.
Commercial real estate agents reported a pickup in activity since our last report. Demand for office and retail space remained strong, particularly in the Washington, D.C., metropolitan area. A contact in the District of Columbia said there continued to be a great deal of interest in office and retail space near the site of the new ballpark for the Washington Nationals baseball team. Real estate agents in Northern Virginia described office activity as "very strong"--contacts in McLean, Va., and Prince William County said that higher interest rates "had not slowed things at all." Contacts in the Carolinas also reported generally strong commercial activity. An agent in Columbia, S.C., said that it had been a "very positive market" all summer, and noted continued solid leasing of office and warehouse space. Rents in the commercial sector were little changed since our last report.
Tourism remained strong in late July and August. Contacts in Myrtle Beach, S.C., and on the Outer Banks of North Carolina reported brisk restaurant and retail sales for the month, which they attributed to sunny weather and later starting dates for North Carolina schools. A hotelier in Virginia Beach, Va., said that holiday bookings for the Labor Day weekend were strong. Analysts reported that tourism in Washington, D.C., had recovered from the severe downturn following the terrorist attacks of September 11th 2001, and was expected to surpass the record year of 1998 when the area attracted more than 19 million visitors.
Contacts at temporary employment agencies in the District reported moderately higher demand for workers in recent weeks and, in a few cases, more difficulty finding qualified workers. The warehousing, manufacturing, construction, and hospitality industries were actively seeking temporary employees. A contact in Richmond, Va., said that her clients were turning to temporary agencies in order to reduce costs of benefits and payroll administration. Agents in South Carolina reported that their clients were optimistic about their business prospects and were increasingly hiring more temporary workers to permanent positions.
Despite excessively hot and dry weather in much of the District in August, crops and livestock were said to be in generally good condition. Soybeans and cotton progressed well in South Carolina and yields on corn harvested early have been excellent. Although a third of the farmland in North Carolina was rated as short of moisture, corn and soybean crops have developed ahead of schedule. Tobacco harvesting was underway in Virginia, but agricultural analysts warned that high energy costs would likely boost the costs to cure tobacco. In Maryland, harvesting of cucumbers, lima beans, and snap beans was ahead of schedule. Cattle and sheep were reported to be in good condition in West Virginia.