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Federal Reserve Districts

Fifth District - Richmond

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The Fifth District economy expanded at a faster rate in March and early April, with growth balanced across nearly all sectors. Led by a surge in shipments, manufacturing activity bounced back, posting its strongest showing since October. Retail sales were robust, and the service sector grew more rapidly. Activity in commercial real estate and tourism strengthened, while drier weather enabled farmers to resume tillage and planting. Bank lending slowed, and realtors and homebuilders provided conflicting reports about activity in the housing sector. Labor markets remained tight, with continuing wage pressures and shortages of qualified workers. Prices continued to increase only slightly, with the notable exception of a sharp rise in building materials prices.

Retail Trade
District retailers indicated that the pace of activity accelerated in March and April from our last report. Sales revenues jumped sharply; one Virginia contact remarked that "[strong] consumer confidence is a contributing factor." Retail employment expanded slightly faster than in prior months, and wage growth was remarkably strong. Sales of big-ticket items improved considerably, as did shopper traffic. District retailers noted that their prices had changed little in recent weeks. They were markedly more optimistic about demand for their products during the next six months.

In recent weeks, the service sector posted its strongest monthly gain in three years. Results from a survey of service producers indicated that revenues grew more quickly, led by strength in the wholesale trade and health services sectors. Growth in employment and wages eased, however. Contacts indicated that their prices rose more slowly in recent weeks. Looking forward, they expected steady demand for their services over the next six months.

Manufacturing activity rebounded sharply since our last report. According to a survey of District manufacturers, shipments rose at the fastest monthly rate in several years. Apparel, furniture, paper, and industrial equipment firms displayed particular vigor, snapping back from several months of decline. New orders and backlogs surged, leading manufacturers to draw down their inventories. Despite widespread complaints of labor shortages, employment rose somewhat. Vendors' lead times edged up, and manufacturers stated that their suppliers were letting quality slip. Contacts reported that finished goods prices changed little, and that raw materials prices grew more slowly. Respondents' six-month outlook was for lower finished goods prices and somewhat higher raw materials prices.

Tourist activity benefited from unusually mild weather in March and early April. Unseasonably warm temperatures and an early Easter boosted tourism at the beaches. A Baltimore, Md., hotelier attributed the increase in his bookings to a stronger economy along with the favorable weather. Contacts expected better-than-normal business and slight price increases during the next six months.

Port Activity
Representatives at District ports indicated that both import and export levels were higher in March than in February. Contacts expected imports to decrease and exports to remain about the same during the next six months.

Temporary Employment
Placement agents said that demand for temporary help intensified in March and early April. One contact in northern Virginia noted that her clients' requests for workers were "up 25 to 30 percent" so far in April. The demand for employees with computer skills remained particularly pronounced. Sources noted that labor markets continued to be extremely tight. Wages inched up, and most agencies reported that finding qualified workers remained a problem.

District banks indicated that lending activity edged lower since our last report. Bankers reported that mortgage loan demand weakened in recent weeks as interest rates moved higher, although they noted that consumer lending was little changed. On the commercial side, the demand for loans was mixed. Some contacts characterized lending activity as strong; a Virginia banker said there was "more [commercial loan] activity than I've seen in several years." However, other lenders suggested that higher interest rates and greater concern over stock market volatility had tempered loan demand in their areas. Competition for commercial loans remained stiff, and one banker described loan terms as "absolutely insane."

Residential Real Estate
Realtors and homebuilders provided contrasting views of housing activity over the last six weeks. Real estate agents characterized activity as brisk, noting that the recent uptick in mortgage rates had bolstered customer traffic and home sales. One realtor remarked, "everybody is taking the plunge." Homebuilders' perspectives of the sector were not as upbeat. Conversations with builders indicated that customer interest was down sharply, and that housing starts and permits were off slightly. A Virginia contractor said that the recent rise in mortgage rates had created nervousness in the market. Construction costs increased; subcontractor wages rose, and materials prices--especially lumber, concrete, and drywall-- jumped considerably.

Commercial Real Estate
Commercial real estate activity continued to escalate in recent weeks. Office, retail, and industrial leasing remained vigorous in most jurisdictions, and accelerated further in the District of Columbia and North Carolina. Commercial vacancy rates continued to fall, moving into single digits in some large metropolitan areas. Commercial rents rose in all jurisdictions; one northern Virginia broker commented that rents seemed to be rising "a dollar a [square] foot a month" in his area. The availability of prime office space tightened even further, and sources throughout the District again reported shortages. Most respondents reported an increase in new construction. A Charlotte, N.C., contact expressed some concern about the sector's prospect there, noting that construction was currently outpacing absorption in his area. On the other hand, a branch director from Raleigh, N.C., relayed a commercial developer's comment that there was "little risk of overbuilding, such as in the 1980s."

State Revenues
State revenues increased at a slower pace in March. General fund collections grew more slowly, except in Virginia, where they increased at a faster rate. Withholding tax collections experienced steady growth, although our contact in South Carolina noted weakness there despite moderate job growth.

Drier weather in recent weeks allowed District farmers to catch up on spring tillage and planting. Planting progress was reported as being at or above the five-year average for most crops. In South Carolina tobacco transplanting was "a couple of weeks ahead" of schedule and corn planting neared completion. However, strong, drying winds and cooler-than-normal temperatures hampered crop development in some areas, and a late cold snap caused minor damage to fruit and vegetable crops. Cattle herds remained in generally good condition and required little supplemental feeding. In North Carolina, hog producers held record inventories--up 13 percent from a year ago--and planned to increase farrowings considerably in coming months.

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Last update: May 7, 1997