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Federal Reserve Districts

Fifth District--Richmond

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Fifth District economic activity posted modest gains since our last report, as services and housing activity expanded further and manufacturing showed less weakness. Retailers reported that sales were mixed and they noted particular weakness in areas affected by manufacturing layoffs. Manufacturing showed signs of stabilizing after several months of broad-based decline, although textiles and furniture manufacturers continued to lose market share to foreign competitors. Revenues and employment in the services industry rose at a modest pace, partly because low mortgage interest rates continued to boost mortgage lending and residential real estate sales. However, low interest rates did little to boost commercial lending which continued to be lackluster. District labor markets remained generally weak, despite some reports of additional hiring in the services sector. On the price front, contacts noted that prices rose only slightly and they looked for only small increases in the months ahead. In agriculture, heavy rainfall wreaked havoc in some areas, delaying plantings and destroying crops.

Reports from retailers indicated that sales were mixed since our last report. Department stores across the District generally said sales were higher, especially for home merchandise and clothing. Sales of hardware and building supplies also rose. But sales were softer in some manufacturing-dependent areas. A central North Carolina department store manager, for example, said sales had been erratic as local textile plants extended their summer shutdowns. Automobile sales were generally steady.

Fifth District services firms reported modest increases in customer demand and said that they upped hiring in recent weeks. Contacts reported that revenues at financial services businesses were firmer. In addition, continued brisk building activity led District construction firms to add to their payrolls. In northwestern North Carolina, a healthcare system reported hiring greater-than-usual numbers of newly graduated nurses, but other contacts in the region said that soft labor market conditions persisted as laid-off factory workers experienced long periods of unemployment. A professional staffing firm in northern Virginia reported increased demand from clients, especially those in telecommunications. Trucking firms in North Carolina also reported increased demand from their customers. Most District services firms continued to report only slight increases in the prices they charge.

Activity in the manufacturing sector generally held steady in recent weeks. Shipments and new orders were reported to be little changed while capacity utilization and employment edged lower. But encouraging signs began to appear in the sector. Contacts in the textiles, electronics, and plastics industries noted scattered signs of strengthening demand for their products in June. In addition, a plastics manufacturer in North Carolina told us that both shipments and new orders were higher while a textile manufacturer in the state said that his company had recently experienced "two weeks of good orders." Other industry contacts, however, continued to report substantially lower sales. An apparel manufacturer in North Carolina, for example, told us shipments were 30 percent below a year ago, in part because of low priced imports from China. Furniture manufacturers also reported continued declines in shipments and increased competition from Chinese manufacturers. Although contacts reported that manufacturing raw materials prices increased at an annual rate of less than 1 percent, several District manufacturing contacts reported sharp increases in the price of natural gas.

District loan officers said that lending activity was little changed in recent weeks. Despite ticking up in the first half of July, mortgage interest rates remained low, sparking continued strong residential mortgage lending. Home mortgage refinancing also continued strong-a lender in Greenville, S.C., reported that refinancings accounted for 70 percent of his firm's lending activity in June and July. Commercial lending activity, however, remained sluggish. A banker in Charleston, W.Va., described commercial lending there as "moderate at best," not what he expected given the current level of monetary and fiscal stimulus. A counterpart in Charlottesville, Va., said lending was simply "slow" due to generally weak economic conditions. In contrast, a lender in Richmond, Va., was a little more upbeat, reporting that commercial lending had picked up in that area.

Real Estate
Residential realtors reported continued growth in home sales since our last report. An agent in Greenville, S.C., said sales in that area were "exceedingly" good, while a realtor in Richmond, Va., reported that June sales broke records at his office. A contact in Odenton, Md., reinforced the strong tone, saying that home sellers continued to receive multiple offers and that home prices had soared in recent months. In contrast, a realtor in Asheville, N.C., reported that while sales in his area were "doing well," home listings had slowed in the last few weeks. Across the District, homes in the low- to middle-price range continued to be the most active market segment.

Commercial realtors reported that leasing activity languished in June and early July. Demand for commercial space was flat across all sectors and vacancy rates were little changed. Rents were generally flat as well, although landlord concessions reemerged in the office and retail sectors. Several commercial realtors noted increased concerns about office space located near state capitols as state governments consolidated operations in response to budget shortfalls. "The health of this market depends greatly on the degree of pull-back of the state," remarked a contact in Columbia, S.C. Despite the general sluggishness, there were bright spots in some commercial real estate markets in Virginia-leasing activity picked up in northern Virginia's Prince William County and the warehouse sector was reported to be strong in Roanoke.

Tourist activity strengthened since our last report. Hoteliers at Virginia Beach, the Outer Banks of North Carolina, and Myrtle Beach, S.C., reported stronger bookings for the Fourth of July holiday weekend compared to a year ago. Contacts attributed the increase to sunny weather and an increase in the number of families taking vacations closer to home. Mountainous areas also fared well. A manager at a mountain resort in Virginia told us that timeshare sales were 7 percent ahead of last year's pace and that his resort was booked solid for the summer. In Washington, D.C., the Fourth of July fireworks show on the National Mall attracted a particularly large crowd. Though officials did not estimate crowd size, a Metro spokesman said that 429 thousand riders passed through Metro's fare gates during the event compared to 302 thousand in 2002.

Temporary Employment
Contacts at temporary employment agencies in the District reported only modestly higher demand for workers in recent weeks. They attributed the slow growth to the continued subpar economic recovery. An agent in Richmond, Va., said that demand for temporary workers picked up over the past few weeks but added that demand was below the level of a year ago. An agent in Morrisville, N.C., said that while he had a few new customers "in the pipeline," it was difficult to predict future demand for his company's services given current economic conditions. Likewise, a Hagerstown, Md., contact was not optimistic that demand at his agency would improve, stating "the economy simply has not recovered." Wages for temporary workers generally remained steady throughout the District.

Heavy thunderstorms and warmer-than-normal temperatures prevailed throughout the District in recent weeks, slowing the harvesting of small grains, delaying planting activity, and damaging some crops. In Virginia, farmers reported that some double-cropped soybeans will not be planted and that some wheat fields will not be harvested because of the continued wet conditions. In North Carolina, wet weather damaged hay in some areas and drowned tobacco, soybeans, and cotton crops in others. On a brighter note, the vegetable harvest was underway in Maryland and the peach crop in South Carolina remained in good to excellent condition.

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Last update: July 30, 2003