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Fifth District economic activity expanded at a somewhat quicker pace since our last report as services and manufacturing activity gained some momentum. District service-producing firms reported stronger growth in revenues and steady gains in employment in September and early October. Retail revenues rose as well, despite sluggish sales of automobiles and a pullback in hiring in September. Manufacturing output gathered some steam; shipments, new orders, and capacity utilization picked up the pace in September and early October. District housing sales remained generally solid and demand for office and retail space strengthened. In the financial sector, bank lending expanded at a moderate pace. On the price front, substantially higher energy and building materials prices rippled through the economy in the wakes of Hurricanes Katrina and Rita, leading District businesses to raise their prices. In agriculture, unusually hot and dry weather during much of September depleted soil moisture and slowed fall planting, but early October has seen steady rainfall and improved soil conditions.
District retailers reported moderate growth in shopper traffic and sales in September and early October. A manager at a large department store in North Carolina said that sales were "on track" heading into the holiday season, and furniture retailers throughout the District generally reported stronger sales growth in recent weeks. But several of our contacts said that higher gasoline prices were hampering sales growth. An automobile dealer in the Washington, D.C., metropolitan area said "when there's news of gas price spikes, business stops." Retailers generally passed along some of the higher costs of energy and commodities to their customers, leading to a quickened pace of retail prices in the past six weeks. A Richmond, Va., hardware store owner reported that he tacked on freight surcharges, while a South Carolina lumber retailer raised prices to recover higher wholesale lumber costs. Retail hiring contracted modestly since our last report.
Services firms reported stronger revenue growth in September and early October. Professional, scientific, and technical firms generally reported faster revenue growth. A contact at a North Carolina trucking firm indicated that business was still good, despite raising prices to recover higher diesel fuel costs. Hiring in the services sector rose moderately and wages increased briskly. An executive at a healthcare system in North Carolina told us that wages in some medical professions, particularly nursing, had risen substantially. Despite some transportation-related price increases, most services sector contacts said that price increases remained modest.
District manufacturing activity rose at a quicker pace in September, driven by faster growth in factory shipments and new orders. Product demand strengthened appreciably in the chemicals, fabricated metals, furniture, rubber and plastics, and transportation equipment industries. A North Carolina plastics manufacturer told us, "We are busy now; the outlook is good, and we will probably be adding people and equipment." In contrast, some textile manufacturers continued to indicate that their shipments and new orders were declining. A textile manufacturer in Greensboro, N.C., said his firm was closing a denim plant in part because of stiff competition from Far Eastern manufacturers. Raw material prices continued to escalate and a number of respondents expressed concerns about declining profit margins. A fabricated metals manufacturer, for example, reported that raw materials prices were "skyrocketing" and he planned to partially offset higher costs by raising prices. He anticipated losing some sales as a result, however.
District bankers said that lending activity continued to expand at a moderate pace in September. Commercial lending was somewhat higher, boosted by increased merger and acquisition activity. Several bankers, however, noted that some business clients were reluctant to borrow because they were concerned about their future business prospects, while other clients had little need to borrow because they were "sitting on" large cash reserves. Residential mortgage lending rose at a modest pace, bolstered by continued gains in home sales and mortgage interest rates below 6 percent. Credit standards were generally unchanged and credit quality remained good.
Residential real estate agents reported mostly strong housing activity in September, although demand continued to cool in some areas. Agents in Fairfax County and Virginia Beach, Va., said their local housing markets "were doing very well." A contact in Greenville, S.C., said "sales were outstanding," while a contact in Greensboro, N.C., reported "lots of activity." But signs of moderating activity were a little more widespread in recent weeks. An agent in Fredericksburg, Va., noted "the market's not as crazy as it once was," while a contact in Odenton, Md., said she was not seeing as many multiple offers on properties for sale. Although home prices in many areas continued to rise, there were a number of reports of prices leveling off. Residential homebuilders reported relatively strong housing starts and building permits in September and higher costs of construction materials, particularly lumber.
Commercial real estate agents reported generally steady growth in leasing activity in September. Demand for office and retail space strengthened, with activity in Washington, D.C., continuing to lead the way. An agent in the District of Columbia noted that office and retail leasing was advancing at a healthy clip and that he had "never seen such strong markets." Agents in Greenville and Columbia, S.C., reported steady gains in office and retail leasing and a pickup in industrial leasing activity. Commercial construction activity was modestly higher; a contact in Raleigh, N.C., said there were "lots of dump trucks on the road," signaling strong construction activity in the area. But construction costs were rising. An agent in Northern Virginia said that costs had risen by 30 percent over the past 18 months, and several contacts speculated that construction costs would rise further in coming months.
Tourist activity slowed in September and early October. Contacts in coastal areas said bookings for the Columbus Day weekend were soft, which they attributed to higher gasoline prices. A hotelier in Virginia Beach, Va., said that group bookings had declined in recent weeks and that the industry was anticipating lower occupancy in the weeks ahead. On a brighter note, a manager at a Virginia mountain resort told us that their business had picked up and noted that timeshare sales were particularly strong.
Contacts at temporary employment agencies in the District generally reported stronger demand for workers since our last report. Although some firms remained concerned that rising energy prices might slow economic growth and with it demand for temporary employment services, most agents looked for firmer demand over the next six months. Distribution and warehouse workers, customer service representatives, and administrative assistants were widely sought.
Hot and dry weather in September depleted soil moisture and hindered fall planting in many areas of the District, though widespread rainfall in early October improved soil conditions. As of October 3rd, 77 percent of farmland in North Carolina and over 80 percent of farmland in other District states was short of moisture. Analysts said that planting of winter wheat, rye, oats, and barley proceeded slowly because of dry soil in September but substantial rainfall in October improved planting conditions. The rain came too late, though, to improve yields for many crops reaching maturity and being harvested.