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Federal Reserve Districts

Fifth District--Richmond

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The pace of economic activity in the Fifth District slowed further in recent weeks, behind weaker readings on retail sales, manufacturing, and housing. District merchants reported generally lackluster holiday sales, while revenue growth at service firms softened. Additionally, activity at District factories pulled back with declines in shipments and new orders. In the real estate sector, housing activity continued to slump in December and early January as home sales remained sluggish and inventory levels climbed higher. In the commercial segment, leasing activity was down somewhat and rents were flat. Adding to the softer tone, demand for home mortgages continued to wane, though assessments of commercial lending activity were mixed. There were some bright spots, however. Tourist activity picked up since our last report and rainfall in late December and early January improved conditions at some District farms. Turning to labor markets, the pace of hiring moderated in recent weeks, though wage growth was steady. Price measures were up across the board and contacts continued to voice concerns over rising energy costs.

According to Fifth District retailers, sales remained weak and hiring activity continued to decline in recent weeks. Reports on the holiday shopping season were generally downbeat. A department store manager in central North Carolina told us that extended store hours just before Christmas had little impact on sales. Similarly, a large home improvement retail chain said same store sales were below year-ago levels, due in large part to continued softness in housing. In addition, a sporting goods retailer in West Virginia said holiday sales at his store were slower than anticipated. Reports on sales of automobiles and light trucks were mixed. Dealers in Virginia Beach, Va., and Charleston, W.Va., told us that sales fell sharply in recent weeks, while a contact in the Washington, D.C., area said activity at his dealership was “very busy.” Retail wages grew at a faster clip in December, though retailers continued to trim payrolls. A department store executive in Maryland said that regular employees’ hours had been “cut to the minimum level allowed for employee benefits,” while a store manager in Virginia Beach, Va., noted that “hours have been cut to the bone.” Retail prices were up in recent weeks behind sharp increases in food prices.

Contacts at services firms reported slower revenue growth since our last report, which they attributed to a growing sense of uncertainty among their customers. An executive at a Baltimore, Md., financial services firm said his clients had become increasingly “hesitant” because of mounting concerns about the economy, while a contact at an advertising and web services company in northern Virginia commented that his firm “didn’t need a report to know that consumer confidence is down because we feel it everyday.” Hiring at services firms slowed in recent weeks, particularly at information technology firms, while average wages continued to grow at a healthy pace, and prices edged higher.

District manufacturers reported that activity pulled back in December as shipments and new orders moved lower. Product demand was particularly weak at electronics, food, lumber, paper, rubber and plastics and building supply firms. A plastics producer in North Carolina told us, “our activity level has cooled as of late,” while a manufacturer of stone products in Virginia said the prolonged weakness in housing continued to curb customer demand. Hiring activity at District factories was limited in the final month of 2007, though wage growth was steady. Concerns about rising energy costs were more widespread in recent weeks as both raw materials and finished good prices grew more rapidly since our last report.

Demand for home mortgages generally continued to taper off, though scattered reports of increased lending activity emerged in recent weeks. Contacts in Hilton Head and Greenville, S.C., said that lending activity slowed in December and early January, while a contact in Charlotte, N.C., reported a pullback in demand for home equity loans. Assessments from other areas were somewhat brighter, however. A Washington, D.C., mortgage lender, for example, told us, “loan activity has picked up recently and this December was actually busier than last year.” In addition, a Charlotte, N.C., contact reported an uptick in refinancing activity as clients continued to switch from adjustable to fixed rate products. Interest rates on mortgages edged lower and credit standards tightened a bit further since our last report. A Raleigh, N.C., contact told us that more documentation was being required for new mortgages, and a Charlottesville, Va., lender reported that his firm was requiring higher minimum credit scores. Turning to the commercial side, reports on lending activity were mixed. A contact from Charlottesville, Va., reported that loan demand had increased over the last six weeks, a loan officer covering Virginia and the Carolinas reported that demand had been steady since November, while a lender in Charleston, W.Va., said business had been “pretty slow.”

Real Estate
Slowing activity in the Fifth District’s housing sector continued to weigh on the region’s economy in recent weeks. Residential real estate contacts continued to report generally sluggish home sales in December and early January. A Realtor in the Washington, D.C., area noted “slower sales” during the final month of 2007, while an agent in Fredericksburg, Va., said business had been “very quiet.” Inventory levels continued to swell. A contact in Richmond, Va., told us some builders were now offering ‘rent-to-own’ options in new, high-end neighborhoods. And a contact in Hilton Head, S.C., said builders in that area were “just about giving homes away in order to get them off the books.” Reports on home prices were mixed, however. Sales prices were down slightly in Greensboro, N.C., relatively unchanged in northern Virginia, and a bit higher in Asheville, N.C., and Greenville, S.C. A number of contacts noted that their outlook for the next six months was more encouraging. Realtors in several markets expected “some pickup” in activity during the spring.

Outside of residential markets, commercial real estate conditions softened in December and early January. Leasing activity moderated in recent weeks. An agent in Washington, D.C., said the demand for office space had begun to “drop off,” while a contact in Charlotte, N.C., told us the pace of leasing activity had “slowed back down to the speed limit.” Reports on vacancy rates were mixed. Rates were generally unchanged in Charleston, W.Va., and Raleigh, N.C., but slightly higher in the northern Virginia suburbs. Rental rates were flat in most markets. A contact in Charlotte, N.C., however, told us rents in the city’s central business district were up twenty percent from a year earlier. Construction activity pulled back a bit since our last report with “few projects” in the pipeline. Additionally, agents in Charlotte, N.C., and in Washington, D.C., reported difficulty in obtaining financing as banks tightened credit standards on commercial real estate loans.

Assessments of tourist activity were generally upbeat in recent weeks. Contacts in coastal areas told us that holiday bookings were mostly in line with year-ago levels. Reports from mountain resorts were also positive. A manager at a ski resort in Virginia told us that his hotel was “booked to capacity” during the week between Christmas and New Year’s. Similarly, a contact at a ski resort in West Virginia reported an uptick in holiday traffic at his lodge, crediting the increase to a stretch of accommodating weather.

Temporary Employment
Fifth District temporary employment agents continued to report generally strong demand for workers in recent weeks. Contacts in Raleigh, N.C., and Richmond, Va., told us that labor markets in those areas remained firm, driving demand for temporary workers, while an agent in Hagerstown, Md., said demand had waned a bit since our last report. Warehouse, customer service, sales, and general computer skills were among the most highly sought over the past six weeks.

Moderate rainfall in late December and early January was insufficient to alleviate drought conditions across much of the Fifth District. There were pockets of improvement, however. Contacts said recent rains helped improve winter wheat conditions in Maryland and boosted pasture conditions in Virginia, allowing some livestock producers to cut back on supplemental feeding. Despite the less-than-ideal conditions, small grain plantings in South Carolina were completed on schedule.

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Last update: January 16, 2008