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Federal Reserve Districts

Fifth District - Richmond

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The Fifth District economy advanced at a slow pace in June and July, with moderate growth at services firms accounting for most of the increase. Demand for services grew at a steady pace, although firms said they were watching expenses closely. Retailers reported sharp drops in sales in recent weeks and they reduced employment in July. Manufacturing shipments and new orders continued to skid. Most manufacturers, however, remained optimistic that shipments would pick up by the end of the year. Residential Realtors reported little change in home sales, while commercial Realtors said that leasing and construction activity continued to weaken. Prices of manufactured products were flat, and prices of services were modestly higher. In agriculture, hot and dry weather stressed crops and pastures in many areas of the District, although rain swept across much of the region in late July.

Retailers reported markedly lower revenues in recent weeks. Shopper traffic in District stores dropped and big-ticket sales contracted sharply. A big-box retailer in Gastonia, N.C., characterized sales as "stagnant" while a contact at a department store in the low country of South Carolina reported very slow sales and a cutback in payroll hours. An automobile dealer in the eastern panhandle of West Virginia described sales as "off a little bit" and noted that his company had reduced inventories. Employment in the retail sector declined in recent weeks and wage growth moderated. A big-box retailer in North Carolina said that his store had hired a number of people laid off from other employers in the area -- some at substantially lower pay than they earned in their previous jobs.

Many services businesses across the District reported moderately higher revenues in June and July. However, businesses were closely monitoring their overhead in an effort to preserve their operating margins. Several firms reported less business spending on corporate travel, including car rentals and hotel bookings. A travel agent providing business services in Greenville, S.C., said demand had dropped slightly, and a Baltimore, Md., financial services contact said there was concern among clients that the economy may not have bottomed out. A contact at an accounting firm reported discounting their prices to keep employees busy and said they are "managing the headcount" for the first time in several years. Employment in the sector was flat in June but picked up in recent weeks. Average wages were reported to be rising at a modest pace, but in some cases, more slowly than in recent years.

The manufacturing sector continued to struggle in June and July, with continued declines in shipments and new orders. Production downshifted notably at firms in the textiles, lumber, furniture, paper, and electronics industries. A strong dollar and tenacious foreign competition continued to affect the textiles industry -- a textiles manufacturer in North Carolina said that sales in recent months were the lowest in his memory and he is not optimistic about a turnaround soon. A plastics manufacturer in North Carolina also reported slow summer sales, but he expected a pickup in activity in the fall. Layoffs in the furniture and textile industries continued. On the price front, several contacts noted lower energy prices; overall prices paid for raw materials were flat in July.

District loan officers described lending activity as sluggish in June and July. A Richmond, Va., banker said that business lending was somewhat weak and she noted that many businesses were grappling with problems caused by a sputtering economy. She characterized business conditions as "choppy" -- with "lots of companies doing well and lots of companies doing poorly." A Greenville, S.C., contact also described lending as "somewhat weak," and noted that he continued to keep a close eye on industries, including textiles, health care, and construction, that, in his opinion, might take a turn for the worse. He reported some increase in loan spreads as credit conditions tightened and fewer of his competitors were making loans at bargain basement interest rates. Residential mortgage lending expanded at a moderate pace -- a South Carolina banker said that mortgage interest rates remained attractive and he expected lending to be moderately strong into the fall if rates do not rise.

Real Estate
Residential Realtors and homebuilders reported little change in home sales since our last report. Several builders in the District said they had seen some strengthening in the market for low to middle-priced homes. A homebuilder reported "extremely brisk" sales in the Hampton Roads area. But a builder in Myrtle Beach, S.C. noted a weakness "that wasn't there before" in sales in the mid-priced market. Sales prices remained generally steady throughout the District; an exception was a Greensboro, N.C. Realtor who said that new home prices had fallen there. A contact in Richmond, Va., said that prices of multi-family homes purchased as investment property had risen in recent months. Although most contacts reported little change in labor costs, builders in the Carolinas reported a substantial increase in lumber and drywall prices.

Commercial Realtors across the District reported that leasing and construction activity generally continued to weaken in recent weeks. Office and industrial leasing was softer, reflecting sagging business conditions in the high-tech and manufacturing sectors. Contacts in Northern Virginia and Raleigh, N.C., generally reported a "tenant's market" in office space due to the high-tech shakeout in those areas. Although contract rental rates were relatively stable across commercial sectors, effective rental rates eased in the office and industrial sectors and landlords offered various concessions, such as a month's free rent, to entice tenants. New construction remained sluggish, but contacts in Charlotte, N.C., and Richmond, Va. were "guardedly optimistic" that construction activity would soon pick up. In addition, a contact in Baltimore said that commercial contractors' "order books" were full for the next twelve to fifteen months.

Tourism was flat since our last report. A contact on the Outer Banks of North Carolina reported a brisk business in beach property rentals in July. Hoteliers in both Virginia Beach and Myrtle Beach, however, said they had to discount prices early in the week of July 4 in order to increase bookings. In addition, a tornado struck a resort area in Myrtle Beach on July 6 and damaged several hotels and put a dent in that area's tourist business. Tourism in Baltimore, Md., also received a setback from a bit of bad luck in July -- a fire in a railroad tunnel caused the postponement of three Baltimore Orioles games at Camden Yards and the cancellation of bookings at nearby hotels.

Temporary Employment
Contacts at temporary employment agencies reported mixed demand for workers in recent weeks. A manager in Hagerstown, Md., said that activity at her agency was very weak and she did not expect it to strengthen over the next few weeks. She said her customers were experiencing very slow sales, which had curtailed demand for temporary workers. In contrast, a Charleston, W.V., contact said he had seen an increase in demand for temporary workers from the medical industry, in part because of the transcription services his firm now offered. An agency contact in Raleigh, N.C., reported a strong demand for analysts, research chemists, and technicians for placement in the biotechnology and pharmaceuticals industries. Wages remained unchanged since our last report.

Generally hot, dry weather caused a substantial decline in soil moisture levels across much of the District and threatened crop development in June and most of July. However, significant rainfall occurred over many areas of the District in recent days, renewing hopes of higher yields. Livestock producers in Virginia reported that they might begin supplemental feeding soon because of poor pasture conditions. Some cattlemen in South Carolina weaned calves early because dry pastures had not provided adequate nutrition to nursing cows, but crops there were reported to be in generally good to excellent condition. Crops were also in good condition in West Virginia, where rain has been plentiful in recent weeks, and has caused flooding in some areas.

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Last update: August 8, 2001