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The Fifth District economy continued to advance at a rapid clip in late April and May. Business services and financial firms reported stronger demand and retailers noted continued strength in automobile and housing-related sales. Manufacturers continued to increase output and, in some cases, raise productivity. The real estate sector remained upbeat; housing sales were brisk and commercial activity was strong in Virginia and the Carolinas. Lending at banks remained strong although higher interest rates slowed the pace of mortgage refinancings. Labor markets tightened further and wages rose somewhat faster in the retail and services sectors, but prices increased only moderately. In agriculture, dry weather hampered spring planting and crop development in many areas of the District.
Retail
Retailers reported increased sales since our last report, but growth has slowed compared to earlier in the year. Automobile and housing-related businesses fared especially well in recent weeks. Retail inventories expanded in May as stores anticipated stronger sales in coming months. Retailers expressed increased concern over their inability to attract workers. A hardware retailer in Columbia, S.C., for example, complained that a "lack of employees was stopping growth" at his firm. Reports indicated that strong wage growth persisted, but the size of the retail workforce was little changed. Price gains remained modest; many contacts said that although wages were rising, competition prevented them from raising their prices.
Services
Services revenues expanded at a brisk pace in recent weeks, driven by stronger demand for business and financial services. Real estate firms benefited from the District's strong housing markets while favorable weather increased travel and boosted hotel revenues. After pausing in April, services firms added to their workforces in May. Labor markets remained extremely taut and led to higher wages for workers in business and professional services. Prices, however, rose only modestly since our last report.
Manufacturing
District manufacturing activity continued to grow at a moderate rate since our last report. Shipments, new orders, and capacity utilization maintained the pace set earlier this year. However, producers of food, chemicals, and fabricated metal products firms reported a notable increase in their businesses. One chemical manufacturer said that "business growth has been good and continues to hold." Several manufacturers noted that they were experiencing record productivity, in part because of increased capital spending. A fabricated metals producer said, "Productivity is our salvation at this plant. If it begins to subside, price inflation will follow." In labor markets, wages and employment fell, but the average workweek was little changed. Price pressures remained generally dormant; only scattered increases were noted by District manufacturers.
Finance
District loan officers reported that loan demand remained strong although higher interest rates slowed the pace of mortgage refinancing activity in late April and May. A Greenville, S.C., lender described mortgage refinancings as being "choked off" by rising mortgage rates. In contrast, new loan originations were generally steady and mortgage lenders continued upbeat, noting that housing markets remained robust and that mortgage rates stayed relatively attractive. Commercial lending activity was strong, driven by continued solid business expansion and construction activity in the region. Commercial lenders characterized competition between banks for commercial accounts as intense and told us that lending institutions continued to "steal customers" from their competitors.
Real Estate
Realtors reported that residential home sales continued at a brisk pace in recent weeks, especially in selected areas of Virginia. Prices were said to be rising sharply in popular neighborhoods in Northern Virginia, Richmond, and Virginia Beach. District realtors said that mid-priced homes were currently the strongest market segment, except in West Virginia where homes priced below $125,000 were noticeably stronger. One West Virginia builder said, "Anything above that, I wouldn't build speculative for love nor money." Homebuilders throughout the District continued to report shortages of skilled labor and building materials, particularly drywall. One upstate South Carolina builder told us that despite low unemployment rates in the area, construction workers could still be found; however, quality of these workers, in his words, "leaves a lot to be desired."
Commercial real estate activity was stronger in recent weeks, particularly in Virginia and the Carolinas. The pickup in activity was most noticeable in Charlotte, N.C., where, according to one contact, there were "a lot of tenants making big space commitments � big companies [that were] bullish on the market." The acceleration included new retail, office, and warehouse developments. In South Carolina, stronger growth was driven by new companies relocating to that area, which pushed rental rates higher. But some realtors were less optimistic regarding continued strength in the sector. In Northern Virginia and North Carolina, realtors were concerned that there may be insufficient demand to absorb the new office space coming to market.
Tourism
Tourist activity was somewhat stronger in recent weeks. A contact on the Outer Banks of North Carolina told us that--in contrast to a year ago--local hotels were "almost booked to capacity" during the Memorial Day weekend. Several hoteliers in the area reported that excellent weather during the holiday weekend boosted consumer spending on outdoor sports such as windsurfing, kayaking, golfing, and fishing. In Myrtle Beach, S.C., record-breaking attendance at two motorcycle rallies revved up tourism in May. Most contacts commented that hotel rates had increased recently and would likely continue to move higher as the summer season progressed.
Temporary Employment
The demand for temporary workers rose further in recent weeks placing additional strains on the District's already stretched labor markets. Although labor remains plentiful in rural areas hit by textile plant closings or cutbacks in coal operations, qualified workers were becoming extremely scarce in most urban areas of the District. According to one contact in Charlotte, N.C., manufacturing firms, in particular, have been scrambling for workers and paying dearly for them. In addition to skilled manufacturing workers, "anyone that can operate a personal computer can get a job," according to an employment agent in Northern Virginia. Our contacts indicated that wage increases have become widespread across job types and industries in recent weeks.
Agriculture
Unseasonably dry weather across most of the District in recent weeks continued to threaten crop development and hamper planting progress in many areas. A shortage of rainfall led some South Carolina cattle producers to supplement their pastures with hay, and in Maryland, reports of herbicide failure due to inadequate moisture were widespread. Some soybean producers in Maryland have halted planting until more moisture becomes available for proper germination of their crops. Despite dry conditions, the peach crop in the Carolinas was reported to be the best in years.
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Cleveland