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Federal Reserve Districts

Fifth District - Richmond

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Fifth District economic activity advanced at a solid pace in late September and October, despite some easing of growth in interest-sensitive sectors. Retailers reported stronger sales and a pick-up in employment while manufacturers recorded moderate gains in shipments and an increase in capacity utilization. The services sector reported modest growth in revenue and employment outside of finance and real estate. At financial institutions, commercial lending remained strong, but residential mortgage lending flagged. Real estate activity was mixed; both residential and commercial markets remained buoyant, although growth slowed in some areas. Wage growth strengthened further in many sectors of the economy, while price increases remained generally subdued. In agriculture, a series of hurricanes in September and October brought heavy rain and flooding in eastern regions of the District, and slowed the planting of small grain crops in Virginia and North Carolina.

Retail sales growth exceeded expectations in late September and October. Furniture sales were particularly robust, driven in part by homebuyers moving up to larger homes in recent months. A retail stock analyst in Richmond, Va., stated that back-to-school sales were strong in September, and predicted that solid sales growth would continue into the upcoming holiday season. District retailers anticipate good holiday sales and a number have stepped up hiring much earlier than usual in an attempt to "beat the rush" for holiday sales help. Wage growth picked up noticeably as retailers sought to expand payrolls, but retail price increases remained moderate.

Revenue growth in the services sector has been spotty since our last report. Business services revenues were generally higher, especially in Richmond, Va., and Charlotte, N.C. However, growth in finance and real estate activity was trimmed by anticipations of higher interest rates, and many restaurant and entertainment businesses in coastal areas of North Carolina and Virginia experienced sales declines in the aftermath of Hurricane Floyd. In addition, brisk sales of new cars slowed revenue growth at automobile repair shops; one South Carolina contact remarked, "No one needs to fix a car when they're all brand new." Employment at services producing firms was flat since our last report, while substantial wage growth persisted.

District manufacturing activity generally grew at a moderate pace in September and October, even though softness remained in some industry segments. Shipments and capacity utilization levels increased; production was particularly strong in the printing and publishing, fabricated metals, industrial machinery, and rubber and plastic industries. A North Carolina producer of industrial machinery said that his company had recently scheduled an additional shift because of a surge in its custom fabrication business. In contrast, textiles and apparel producers continued to report weak demand and production overcapacity--particularly in denim lines. According to a North Carolina producer, excess denim manufacturing capacity has caused a "price war" for those product lines. He expected six months or more of difficult market conditions ahead. In labor markets, manufacturing employment and wage growth held steady, while the average workweek fell. Prices paid for raw materials rose, in part because of substantial increases in petroleum prices.

District bankers reported that commercial loan demand remained strong in September and October, while the demand for home mortgages eased. Commercial bank lending was driven by continued business expansion in the District and, in some cases, the anticipation of higher interest rates. A Charlottesville, Va., banker noted that his commercial business borrowers were securing loans now, "before rates go up further." Although mortgage rates have not advanced substantially since our last report, mortgage lenders indicated that earlier rate increases had cooled loan demand. Mortgage refinancings, in particular, were down considerably. Competition for residential mortgage customers intensified; a banker in Greenville, S.C., noted that he was seeing more competition from lending affiliates of large national home building firms.

Real Estate
Residential real estate activity in the District remained at a high level, although the pace of sales activity eased in recent weeks. Realtors said that people are taking a little more time to purchase a house now, and, in the words of a central North Carolina realtor, "…are looking for less house." Some of the slowdown in that state can be attributed to Hurricane Floyd, which slowed real estate activity in eastern North Carolina but had little effect on markets in other areas. Shortages of labor and building materials persisted in some areas, but wallboard was said to be somewhat more available. Construction labor costs rose slightly, especially in the Tidewater Virginia area.

Commercial real estate activity was mixed since our last report. A contact in southern Maryland reported a slowdown in office and retail leasing; in contrast, a realtor in the Maryland suburbs of the District of Columbia said any Class A office space coming on the market was pre-leased. A realtor in Charlotte, N.C., told us that office construction continued in suburban areas, and that the supply of Class A office space was tight downtown. Vacancy rates generally changed little, except in Richmond, Va., where realtors reported that Class A space was being "eaten up," by a large financial services company.

Tourist activity strengthened in mountain areas of the District but weakened along the coast after three hurricanes brought extensive flooding to coastal areas. A contact on the Outer Banks of North Carolina reported a decline in bookings in both September and October and noted that tourist activity had simply lost momentum in the aftermath of Hurricanes Dennis and Floyd. A Virginia Beach hotelier reported a 16 percent decline in occupancy due to inclement weather. Resorts in mountain areas, however, benefited from the storms; a contact at a mountain resort in Virginia reported that tourism in that area strengthened as vacationers escaped the battered coast and headed for the mountains.

Temporary Employment
The demand for temporary workers remained high since our last report, while the supply of qualified workers shrank further. Contacts in Virginia and the Carolinas reported increasing turnover among temporary employees as these workers pursued higher paying job opportunities. Wages for temporary workers rose at a faster pace since our last report, but wage growth was not expected to accelerate substantially in coming months.

The hurricanes brought heavy rains to farmland in most of the District. With the exception of West Virginia, soil moisture levels are now generally either adequate or surplus. In addition, the recent weather conditions were favorable to the fall planting of the Maryland, West Virginia, and South Carolina small grain crops. In contrast, wet fields continued to hamper planting of small grains in Virginia and North Carolina. Peanut harvesting activity is behind schedule in Virginia and the Carolinas, as is the harvesting of cotton. Wet weather also led to a poor pumpkin crop, as the gourds rotted in many fields. Pasture and livestock conditions continued to improve in South Carolina and Virginia, but remained poor in West Virginia.

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Last update: November 3, 1999