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Federal Reserve Districts

Fifth District--Richmond

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Fifth District economic activity continued to expand at a solid pace in late November and December, despite somewhat slower growth in the manufacturing and housing sectors. District services businesses noted steady increases in revenues, and retailers reported generally strong holiday sales. The manufacturing sector lost some momentum, however; output growth slowed in December as furniture, lumber, and textiles production weakened. District housing markets remained generally strong, despite slowing home sales in some areas and flattening home prices in many areas. In the financial sector, bank lending rose at a more modest pace as residential mortgage lending barely rose. Reports on tourism were upbeat; hoteliers in both coastal and mountain areas said that their bookings remained strong. In District labor markets, employment growth was generally modest. Business contacts said that most goods and services prices rose at a slower pace, in part because of moderating energy prices. In agriculture, late fall harvesting was hampered by cold temperatures and heavy precipitation in some areas, but the rainfall benefited winter grain crops.

Retail sales growth picked up in the weeks since our last report. District retailers reported generally solid holiday merchandise and gift card sales and expected the redemption of gift cards to boost their sales in early 2006. Contacts at grocery stores also reported solid growth in sales. Automobile and light truck sales strengthened at dealerships in a number of areas, but sales of some other big-ticket items, especially furniture, were soft in many areas. Retail hiring was lackluster, but wage growth remained strong. Price growth in the sector eased.

Services firms reported continued solid growth in their revenues. Trucking companies and construction subcontractors, for example, generally reported stronger revenue growth since our last report. In addition, health care, professional, scientific, and technical services contacts reported upticks in revenue growth. In labor markets, growth in employment and wages slowed somewhat. Price growth in the services sector moderated as well.

District manufacturing activity grew more slowly in the weeks since our last report. Factory shipments and new orders expanded at a solid pace in November but were essentially flat in December. Although producers of electronic equipment and rubber and plastics products reported that activity increased, these gains were partially offset by weakness in the furniture, lumber, and textiles sectors. A furniture manufacturer in Virginia reported a decline in shipments and new orders, adding that his company was closing its largest plant because of business lost to overseas competitors. Several contacts in the lumber industry reported falling new orders in December. A contact at a West Virginia lumber company noted, "Everyone's [customers'] inventory is too high--they are not purchasing lumber." A counterpart in North Carolina said that new orders were down because of bad weather in markets in the Northeast. On a brighter note, a plastics producer in North Carolina told us, "We are optimistic; sales and shipping levels are good, and new orders continue to come in." Prices of both raw materials and finished goods rose at a more moderate pace in December.

District bankers reported that lending activity grew more slowly since our last report. Residential mortgage lenders said that decelerating housing markets combined with the typical seasonal lull slowed growth in home mortgage lending in December. District bankers reported that commercial lending leveled off. A contact in Charlottesville, Va., noted "commercial lines are down a bit," and said that he expected sales of large dollar investment property to weaken. But most commercial bankers were optimistic about business in 2006; a lender in Richmond, Va., said that he expected commercial lending to increase by ten percent this year.

Real Estate
Residential real estate agents reported that while housing markets remained generally strong, growth in activity cooled in late November and December. A Richmond, Va., agent said that home sales declined in December and that houses were staying on the market longer there. Agents in Fairfax, Va., Virginia Beach, Va., and Washington, D.C., also reported slowing sales. Still, agents in several areas were quick to point out that housing markets retained considerable strength. A contact in Greenville, S.C., for example, said sales were "outstanding" in November and December-the best in his agency's 40-year history. Comments on home prices also suggested cooling markets in many areas. A Fairfax, Va., agent told us that sellers were now more willing to negotiate on prices, and agents throughout the District said home prices were beginning to stabilize after months of rapid escalation.

Commercial real estate agents reported solid growth in leasing activity since our last report. Contacts in Richmond, Va., and Washington, D.C., said that demand for retail space was particularly strong. An agent in Raleigh, N.C., reported steady growth in office leasing there, in part because "people want to put their money somewhere other than the stock market." Agents across the Fifth District reported little new commercial construction. A contact in Richmond, Va., said "although there are a few planned [commercial] projects, ground has not yet been broken, which is a good thing because it allows us more time to absorb existing space." Commercial rents were steady, but contacts expected further increases as existing space is absorbed. Vacancy rates in most areas of the Fifth District remained fairly low. An agent from Columbia, S.C., expressed optimism for 2006, in part because he expected more stable interest rates this year.

Tourist activity remained strong since our last report. Contacts along the coast told us that warmer-than-normal weather in late December and early January boosted business considerably. A hotelier in Virginia Beach, Va., reported that holiday bookings were much stronger than a year ago, but added that travelers were becoming more price conscious and concerned about high gasoline prices. Reports from mountain areas were also positive--contacts at mountain resorts in Virginia and West Virginia said that they were "packed" between Christmas and New Year's Day.

Temporary Employment
Temporary employment agencies in the District continued to report generally strong demand for workers. An agent in Raleigh, N.C., said that demand typically slackens in the fourth quarter of the year because of the Thanksgiving, Christmas, and New Year holidays, but noted that his agency had received "a lot of job orders" for early 2006. Skilled manufacturing, administrative, and customer service employees were among the most highly sought worker categories across the District.

Colder-than-normal temperatures and abundant precipitation in late November and early December slowed harvesting activity in the District. In Virginia, rain and snow brought small grain seeding and corn and soybean harvesting activity to a standstill. But the rain was welcome in many localities-relieving dry conditions in North Carolina and boosting the emergence of winter grain crops there. Small grain crops were reported to be in generally good condition in most areas of the District.

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Last update: January 18, 2006