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Business conditions in the Fifth District were either weak or weakening in most sectors since our last report. Manufacturing activity contracted moderately in September, after pulling back markedly in August. Retail sales also softened. In addition, activity at non-retail services firms began to decline. Both residential and commercial real estate activity remained near the weak levels seen in recent months. However, in banking, a moderate improvement in commercial lending offset weakness in mortgage lending. Tourism remained strong overall. District labor markets had undertones of weakness, with temp services reporting problems finding qualified workers. Price pressures moderated since our last assessment.
District manufacturing activity continued to contract in September. A primary metals producer reported a dramatic falloff in their domestic orders, noting that a domestic retail chain had recently cancelled a large order. The firm expects to cut production unless orders improve immediately. Similarly, several textile and apparel manufacturers indicated that customers had reduced their purchases. Moreover, a number of furniture producers cited sluggish consumer spending, but added that corporate spending had improved somewhat since our last report. In contrast, an automotive parts maker said that underlying business was very strong. Also, a metal fabricator cited examples of improving orders, with autos and aerospace among his strongest customers. Our latest manufacturing survey showed that raw material prices grew at a considerably slower pace, while prices for finished goods changed little since our last report.
Port activity has advanced at a slower-than-expected pace in recent months. Several analysts stated that exports continued to outpace imports, but characterized both as somewhat soft during the current peak season. An official noted that major retailers were not anxious to build inventory going into the big holiday season and were waiting for an improvement in consumer spending before increasing their import orders. Another port official reported that ocean carriers had also become less optimistic about cargo shipments over the remainder of the year. Auto exports were flat in recent months, according to one analyst, but auto imports were starting to increase as dealers began stocking for the new model year. Exports of coal and other commodities continued to do exceptionally well.
Retail sales generally weakened since our last report, although several merchants reported a pickup in the last week of September. Most contacts indicated that back-to-school sales were satisfactory, but for many, somewhat below expectations; a Virginia retailer commented that sales were "good, though not fantastic." Shopper traffic waned in early September but returned later in the month. A retail contact in central Virginia reported that credit-card use increased toward the end of the back-to-school season, indicating shoppers were more confident, but remarked, if consumers accumulate sizeable levels of debt now, they might spend less during the holiday season. An executive at a Virginia hardware chain also reported strong sales through September, with little difficulty passing through price increases. Looking ahead to holiday sales, a Maryland department store manager was cautiously optimistic and she expected "practical gift-giving" this year. Apprehension about the strength of holiday sales has constrained seasonal hiring for some retailers. Small merchants in some areas reported difficulty obtaining financing for inventory. Big-ticket sales continued to be soft overall, but automobile sales were steady since our last report, according to several contacts. A West Virginia auto dealer said that his sales were close to 2010 levels, while a dealer near the D.C. metro area reported a stronger month, led by imports. Average retail wages and prices increased moderately, according to our contacts.
Non-retail services providers reported slower activity. A number of services providers complained about various new government regulations and regulatory burdens on their businesses. Contacts on the southern Delmarva Peninsula expressed anxiety that new EPA regulations for the Chesapeake Bay could result in local chicken farmers losing contracts to farmers further inland, resulting in trickle-down business closures and job losses. Several executives commented that they were refraining from expansion and hiring and that they were holding cash because of uncertainty about the economy. An executive from a West Virginia engineering firm commented, "We are now in a wait-and-see mode." According to a transportation contact, freight trucking firms faced challenges in hiring long-haul drivers, as drivers opted to remain on unemployment benefits rather than accept higher income for driving long-distance routes. Prices at services firms climbed more slowly since our last report.
Lending activity in the District was mixed over the last six weeks. Several commercial bankers in Virginia and Maryland reported moderate increases in loan demand in recent weeks, although some of the increase was from refinancing. One banker attributed an increase in loan applications to businesses shopping around to establish new bank relationships. Also, a lending officer in Richmond reported a sharp increase in loans to existing customers, because new products were now available and the approval process was faster. However, several bankers in West Virginia and the Carolinas noted a recent slowdown in home mortgage lending, following signs of improvement as recently as July. An exception was home refinancing, which benefited from lower mortgage rates, according to several sources. One commercial and industrial loan officer stated that the recent rise in economic uncertainty had caused several of his clients to pay down debt. Another banker reported that local auto dealers were borrowing less now, but were expected to increase their borrowing for new model year deliveries. Most banks continued to report improvements in credit quality, partly due to tighter credit standards. However, that tightening also contributed to a slowdown of the approval process.
Residential real estate activity continued to be depressed. Several brokers reported that sales in their area had dropped and that housing prices continued to decline. A contact in Charlotte described the local real estate market as worsening, while a source from Richmond stated that new building permits were down. According to a contact in Baltimore, the housing market remained slow and short sales were getting harder to close due to tighter regulatory standards. A Realtor from Northern Virginia said that there were fewer foreclosure sales in the market, but added that short sales were still about 50 percent of her company's sales. Another Realtor in the D.C. area expected fewer sales for the upcoming season because inventory was shrinking, but said that low interest rates should keep the market active. He added that a moderate trend of sales at or above full price should continue for properties in good condition. Finally, a market analyst from the eastern Virginia area noted a modest improvement in sales activity, particularly in more urban areas. He also noted that new construction had shifted towards smaller, more energy-efficient homes.
Commercial real estate and construction activity was little changed from weak levels that have persisted throughout much of this year. Many commercial Realtors described the market as "spotty," with gains one week being offset by declines the next. Warehouse leasing activity fell, due to soft manufacturing sales and production. A Realtor in Virginia cited modest improvements in leasing by small industrial clients who were expanding, but added that he had to offer lower rents to retain several office tenants. An agent covering the Carolinas noted that "leases were getting done," but problems obtaining financing were holding back many deals. A South Carolina Realtor described the office market as mixed, but noted that gains were limited to the high end of the market. On the construction side, several contractors also described business as slow-paced. A contractor in Maryland stated that a slight increase in building renovations during June and July ended in August. Several contractors reported an uptick in government-related projects, while private work continued to decline.
Although reports on labor market activity were varied in September, on balance their tone was more negative than in our last report. Employment agencies reported somewhat stronger demand for temporary help in recent weeks, particularly in the manufacturing sector, but indicated that finding qualified workers was becoming an increasing concern. A Virginia contact noted that one-in-five businesses were having problems finding workers with the desired skills, particularly in the manufacturing and professional business services industries. A manager of a temp agency in North Carolina stated that companies were hiring workers on a more permanent basis, but companies were taking longer to do so than in the past. A temp agency executive from the Charlotte area reported that, despite a backlog of work and employees working a lot of overtime, a manufacturer was still unwilling to hire at this time due to concerns about future demand. According to our latest survey, service sector hiring was flat over the last month. Retail sector wages were weak, while wages at service firms edged up. Hiring by manufacturers strengthened over the last month, while the average workweek eased and wage growth inched higher.
Following Hurricane Irene in late August, hotels and related businesses on the Outer Banks of North Carolina quickly re-opened to serve late-season travelers. The southern portion of the Outer Banks suffered extensive damage, including destruction of buildings and roadways, particularly along the Hatteras side. These tourist destinations are now closed, and many may not re-open until next spring. However, tourism remained vibrant in other areas. A hotel manager in western North Carolina reported strong bookings, both for groups and for pleasure stays. He noted that "leaf peepers" were booked for October and into November, and local holiday attractions were expected to keep bookings up through the end of the year. Hospitality contacts in Richmond and Baltimore also reported solid business. Finally, a contact said that recent international media attention on the earthquake-damaged Washington Monument has been overwhelming. He added that the new Martin Luther King Memorial was drawing huge crowds.