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Fifth District economic growth moderated in January and February as the pace of retail and housing activity slowed. District retailers reported sizeable sales gains in January, but said that colder weather and a decline in gift card redemptions slowed customer traffic and reduced sales in February. Housing markets continued to cool; real estate agents told us that home sales slowed and noted that properties for sale were staying on the market longer. In the financial sector, bank lending expanded at a more moderate pace as growth in residential mortgage lending tapered off. Other services sector businesses generally continued to report solid growth in revenues and employment. Gains were particularly strong at healthcare organizations and professional and technical services firms. Manufacturing activity changed little since our last report; shipments and new orders edged lower in January and rose only modestly in February. Turning to prices, business contacts indicated that prices for most goods and services rose at a somewhat quicker pace. In agriculture, small grain crops were reported to be in good condition, and warmer-than-normal temperatures since the beginning of the year allowed farmers in southern areas of the District to get a head start on land preparation for spring planting.
After posting solid gains in December and January, retail sales pulled back in February. Contacts at apparel and department stores said that unseasonably warm weather, combined with the redemption of a large number of holiday gift cards, boosted sales in January. Shopper traffic and sales slumped in February, however, as the weather turned colder and gift card redemptions trailed off. A big-box retailer told us that more gift cards were being used for necessities this year than in the past--the change was attributed in part to higher energy costs pinching household budgets. Big-ticket sales were generally lower; automobile and light truck sales were especially sluggish according to dealers. A contact in Virginia's Tidewater area said that nearly all of their dealerships missed sales projections in February. In addition, furniture retailers in North Carolina and West Virginia noted that their sales were down. Retail hiring picked up in January but was flat in February. Retail prices continued to rise at a moderate pace in both months.
Service-producing firms continued to report solid revenue growth in January and February. Most of the strength was in professional and technical businesses, such as insurance, accounting, and telecommunications firms. In addition, contacts at several hospitals in the District said that growth in demand for healthcare services picked up. Hiring at services firms was fairly strong and average wages grew more quickly in recent weeks. Prices in the sector also rose at a somewhat stronger pace.
District manufacturing activity changed little in the weeks since our last report. Manufacturers said that shipments, new orders, and employment all edged down in January. But there were indications of a slight rebound in February; shipments and new orders, for example, moved up a bit during the month. Among industries, producers of rubber and plastics, electronics and electric equipment, and apparel reported increases in shipments and new orders. "We are very busy right now--new orders, shipments, and backlog are all up," noted a North Carolina plastics manufacturer. But the comments of a machinery manufacturer in North Carolina were more typical of other contacts' sentiments--"One week's up a little, another's down; it's sort of balancing out." Raw materials prices rose at a quicker pace since our last report, and a number of manufacturers told us that the prices they receive were not rising fast enough to recoup increases in materials costs.
District bankers reported that growth in lending activity moderated since the beginning of the year. Residential mortgage lenders said that cooling housing markets slowed growth in mortgage lending. A Richmond, Va., contact told us that he could attract new business only by promoting new and innovative products, such as interest-only loans. Bankers attributed slower commercial lending growth in part to higher interest rates. A banker in Charleston, W.V., said that lending to coal mining companies was fairly strong but that overall growth in commercial lending slowed because of the "higher interest rate environment." Standards for creditworthiness changed little in recent weeks.
Residential real estate agents generally reported slower home sales from January through early March. An agent in Washington, D.C., said, "It's definitely a buyers' market and they [the buyers] are holding off." He noted fewer multiple offers on homes for sale and said that properties were staying on the market as long as two to three months now. An agent in Richmond, Va., said there had been a "general slowdown" in sales in that area as well, and that buyers were taking longer to purchase homes. He added that buyers felt less pressure to make hasty decisions now that multiple offers were less common. Markets in North Carolina also cooled: a residential real estate agent in Greensboro, for example, characterized the market as "slower, with buyers taking their time" [to purchase homes], while a counterpart in Asheville said sales were flat and upper-price-range homes were selling slowly. Pockets of strength remained, however; a Greenville, S.C., agent, for example, said that market activity had been "extremely positive" in recent weeks because of an increase in new businesses relocating to the area. Consistent with generally slowing sales activity across the District, home price appreciation slowed in many areas.
Commercial real estate agents across the District reported stronger leasing activity in recent weeks. Agents cited employment gains and improving local economies as driving forces behind the pickup. Office activity was particularly brisk. An agent in Raleigh, N.C., noted that office leasing
had been "crazy," accelerating even further from the strong level of late last year. An agent in Northern Virginia reported considerable momentum in the commercial real estate sector, adding that he saw nothing that would "derail" activity in the real estate market in that area. Agents across all sectors reported an uptick in rents. A contact in Washington, D.C., said, "It seems like some of the high construction costs and high interest rates are finally starting to be passed through." Vacancy rates remained stable since the beginning of the year and little new construction was reported.
Tourist activity strengthened since our last report. A manager at a ski resort in Virginia told us that business during the Presidents' Day weekend was outstanding. A counterpart in West Virginia said that he believed the Winter Olympics had sparked interest in winter sports, which had boosted snowboarding and skiing at his resort. Tourism along the coast was also stronger. Hoteliers in Virginia Beach, Va., and on the Outer Banks of North Carolina reported that bookings were much higher in part because of the clement weather in that region.
Temporary employment firms in the District generally reported stronger demand for workers from January through early March. An agent in Morrisville, N.C., noted that employers were no longer "afraid to start hiring," while a contact in Hagerstown, Md., said that firms in all sectors of the economy were experiencing growth and had a greater need for temporary employees. Executive-level assistants, skilled tradesmen, and data-entry clerks were widely sought across the District. Several temporary employment firms noted some difficulty in finding qualified workers to fill positions.
Warmer-than-normal temperatures since the beginning of the year boosted agricultural conditions in much of the District. The mild weather allowed farmers in southern areas of the District to get an early start on land preparation. An agricultural analyst in Maryland noted that the mild winter was "positive for livestock" while a contact in Virginia said that the lack of substantial snowfall this winter allowed greater grazing and reduced the need for hay. Orchard owners in Virginia expressed some concern that the early budding of fruit trees raised the possibility of frost damage later in the season. Contacts reported that small grain crops were in good condition throughout the District.