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Fifth District economic activity edged lower in October and the first few weeks of November as services and manufacturing firms reported softer demand. Widespread declines in revenues at travel related businesses such as airlines and car rental companies contributed to moderate drops in overall service sector revenues and employment. Manufacturing activity also fell as shipments, new orders, and employment tumbled in October. Automobile sales jumped sharply, while non-automobile sales stabilized, and retailers turned more optimistic about sales prospects for the upcoming holiday season. Residential and commercial real estate activity slowed, although lower mortgage rates buffered the declines. Lending activity was mixed--an increase in refinancings contributed to a pickup in residential mortgage lending, but commercial lending slipped as demand for business loans softened. In agriculture, pastures were in poor condition in many areas as dry weather continued to deplete soil moisture.
Automobile sales surged, although retail sales outside the automobile sector were mixed. A contact at a department store in Charleston, W.V., reported a drop in shopper traffic and sales, as did a discount retailer in Raleigh, N.C. Several other retailers, however, said shopper traffic was up compared to September levels. A contact at a bookstore in Concord, N.C., reported, "Everybody's decided to go shopping again." Automobile sales across the District soared as dealers offered zero percent financing and other attractive sales incentives. But an auto dealer in the Washington, D.C., area warned, "When the incentives stop, it'll look like [dealers] shut the front door." Retail employment dipped in October, and few retailers we spoke with were hiring other than for seasonal help. Retailers, however, turned markedly more optimistic about holiday sales prospects.
Services businesses reported moderately lower revenues and employment since our last report. Airlines, hotels near airports, and car rental firms continued to report weaker demand in the aftermath of the September 11th terrorist attacks. In addition, contacts at freight services firms in Maryland and North Carolina noted softer demand, which they attributed to slower economic growth. Engineering firms in central North Carolina that rely heavily on state government contracts were adversely affected by lower government spending. Contacts at several services firms said that they reduced employee hours and were not filling some vacant positions.
After two months of slight growth, manufacturing activity contracted moderately in October and the first half of November--shipments, new orders, and order backlogs all declined from their September levels. Output was down substantially in the apparel, chemicals, and furniture industries. A furniture manufacturer in North Carolina told us that attendance at the October Furniture Market in High Point, N.C., declined by 30 to 35 percent this year and that orders were off by 25 percent. Several textile producers reported weaker sales due to sluggish economic conditions worldwide. Employment in the manufacturing sector fell sharply; one textile producer stated that bankruptcies and plant shutdowns would likely continue for a while in his industry. Prices for manufactured goods were generally flat.
District loan officers said that commercial lending slowed somewhat in recent weeks while residential mortgage lending picked up as declining mortgage rates spurred refinancings. Several commercial bankers noted that loan demand slipped because many companies had curtailed plans for business expansion in recent months. Few lenders expected commercial demand to pick up in coming months although a commercial lender in South Carolina noted that a number of manufacturers in that area had cut costs sharply and were well positioned for a turnaround. Residential mortgage lending received a strong boost from brisk refinancing activity--a Greenville, S.C., mortgage lender said that refinancings now accounted for 90 percent of his business. Several residential mortgage lenders noted delays in processing loan applications because of the sharp increase in applicants in recent weeks.
Residential realtors and homebuilders reported slower growth in home sales since our last report. A realtor told us that sales in the Washington, D.C., area remained strong in October but that growth had moderated "a bit." He reported that the area had become a little more of a "buyers' rather than sellers' market." A Richmond, Va., contact said that houses were staying on the market longer and that prices on some were being reduced. Declining mortgage rates made lower priced homes more affordable for first-time homebuyers but did little to boost sales of homes in upper price ranges. In Greenville, S.C., sluggish sales of higher priced homes created a "flood" of inventory according to realtors there.
Commercial realtors across the District reported generally weaker leasing activity. A realtor in Bethesda, Md., described the commercial market as "slow, but steady." A Richmond, Va., realtor noted that leasing activity in the office sector could be attributed mainly to small firms "taking bites here and there" rather than large firms leasing substantial blocks of space. The availability of Class A office space increased slightly, except in Washington, D.C., where the federal government continued to seek office space for employees recently hired to bolster security and assist in the war effort. Rental rates fell slightly across all sectors, with landlords' rent and facility upgrade concessions increasingly becoming the norm. New construction of build-to-suit projects, targeted mainly for small- to mid-sized professional groups such as law practices, increased across the District.
District tourism continued to rebound from the steep declines experienced immediately after the events of September 11. There were somewhat stronger bookings for the Thanksgiving holiday--a manager at a resort in Virginia attributed the solid holiday patronage to tourists opting to stay closer to home because of concerns with airline safety. He also told us that East Coast ski resorts should see an increase in patronage because fewer skiers will be traveling to resorts in the west. A contact at a hotel in Myrtle Beach noted that although October and early November bookings were slightly below normal, he expected business over the Thanksgiving holiday to equal or surpass last year's level. Respondents in Washington, D.C., reported that the hospitality industry was finally rebounding--bookings improved and many hospitality workers returned to work in the last few weeks.
Contacts at temporary employment agencies generally continued to report relatively weak demand for workers since our last report. Rising unemployment rates in many areas of the District have made it more difficult for some temporary employment agencies to land jobs for workers. An agent in Rockville, Md., said "savvy" employers realize they can pay slightly less now and still attract high quality candidates who are "desperate for work." While many temporary employment agents expected demand for workers to continue to weaken because of the sagging economy, a firm in Raleigh, N.C., reported that demand over the next six months should increase as some area employers move forward with expansion plans that had been put on hold. He reported an increase in demand for workers in the biotech, financial, and e-commerce industries.
Dry weather has persisted in October and early November, depleting topsoil moisture and causing statewide bans on burning in many areas of the District. In South Carolina and West Virginia, farmers hauled water and fed hay to livestock as pasture conditions deteriorated. In addition, dry weather caused poor germination of small grain crops in North Carolina and Virginia. Dry weather, however, facilitated harvesting of soybeans and corn in many areas of the District.