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Federal Reserve Districts

Fifth District - Richmond

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Fifth District economic activity expanded moderately from an already high level in September and early October, amid increased reports of capacity constraints in some sectors. Manufacturing output surged, while growth eased somewhat in the retail and services sectors. Banks reported generally stronger loan demand, particularly for home mortgages. Commercial real estate activity remained robust, but growth in the residential market showed signs of slowing. Labor markets tightened further and moderate wage pressures persisted. Prices, however, were little changed. In agriculture, October rains helped to alleviate drought damage to hay and some field crops.

The pace of retail activity in the Fifth District eased since the last Beige Book. Revenues grew during September, but at a much lower rate than in August. Employment in the retail sector fell. Contacts, however, reported difficulty finding and retaining workers, and wage growth was notably stronger. Sources noted that shopper traffic was little changed from August. Retail inventories grew more slowly than in our last report while sales of big-ticket items weakened further. Retail prices remained stable.

Service sector activity expanded at a somewhat more modest pace in September. Revenue growth at service sector firms slowed. Employment in the service sector increased, but compared to August, the gains were more modest and sources noted a greater shortage of qualified workers. Wage growth eased slightly from August. Looking forward, service providers were more optimistic about future business conditions; most anticipated increased demand for their services through the first quarter of 1998.

Manufacturing activity strengthened in recent weeks as growth in shipments and new orders surged in many industrial sectors. The industrial machinery, transportation equipment, rubber and miscellaneous plastics, and primary metals sectors experienced the strongest growth in September, while the printing and paper products sectors experienced the weakest growth. Contacts in the furniture industry reported a slight moderation in shipments; one manufacturer said that continued weak sales had led to capacity underutilization at her firm. Other furniture industry contacts, however, suggested that demand at their firms was rebounding. The level of manufacturing employment changed little. Sources continued to note severe shortages of skilled labor, particularly of machine operators. Compared to August, wages grew at a slightly higher rate, although prices grew at about the same rate.

Tourist activity continued to strengthen in September and the first half of October. Most respondents indicated that exceptionally mild weather boosted activity above year-ago levels. A hotelier on North Carolina's Outer Banks noted that his business had experienced the best September and October in a decade. A source from West Virginia reported that heightened interest in white water rafting, canoeing and falconry had increased the number of visitors at his resort during September and October.

Port activity slowed somewhat since our last Beige Book with declines in import and export volumes. Both containerized and break-bulk cargo shipments edged downward. Contacts reported stronger growth in automobile and paper products shipments, but noted slower growth in agricultural commodity shipments.

Temporary Employment
The demand for temporary workers continued to increase during September and early October. Contacts at temporary employment agencies said that filling open positions had become more difficult, especially for jobs requiring expertise in specialized computer software. One source said that, because of strong demand for their products, businesses no longer had time to train workers. Several other sources reported that they could no longer find "idle bodies" to put to work, but instead were relying on workers who were interested in changing jobs. As one put it, agencies in her area were now just "reshuffling the same deck." Wage growth picked up in some metropolitan areas during early September, but then appeared to moderate in early October. Contacts expected wages to remain fairly stable until year's end, but felt that wages could rise further early next year.

Lending activity at Fifth District financial institutions strengthened in September and October. Several contacts stated that lower interest rates on mortgages had increased customers' interest in fixed rate mortgages and led to a pick-up in refinancings. A North Carolina banker reported an "explosion of activity" in the home mortgage market. In commercial lending, stiff competition for accounts continued, with interest rates and other terms becoming more favorable to borrowers. Consumer lending was generally higher; one source reported a very strong increase in consumer lending activity at his institution due to a successful in-house promotional campaign.

Residential Real Estate
Residential real estate activity was steady across much of the District in recent weeks. Most contacts reported little change in home sales and customer traffic. A Greensboro, N.C., contact commented that the market there was "not real active, nor was it real bad." Homebuilders generally reported either flat or declining housing starts in their areas. A builder in the Hampton Roads area of Virginia indicated that residential construction was not faring well in his area, while a North Carolina contractor said that some overbuilding might be occurring in that state. Although most building construction costs held steady, several builders noted that lumber prices had risen in recent weeks.

Commercial Real Estate
Commercial real estate activity in the Fifth District remained strong since the last Beige Book. The level of leasing activity changed little from August; some realtors, however, said that they were seeing leasing activity moderate somewhat because of a lack of available space. In most areas, low vacancy rates and healthy rent levels held steady. Contacts reported that rents were moving higher in a few cases, but noted that outside of the Washington, D.C., area, the increases were "nothing extraordinary." There were only scattered reports of new construction; some sources said that given the amount of commercial space currently in the pipeline, many developers were taking a "wait-and-see approach" before starting additional projects.

The arrival of much-needed rains across most of the District in October improved the late-crop yield prospects somewhat according to agricultural analysts. Although not in time to offset drought damage to the corn crop, recent rains assisted soybean, cotton, and peanut yields, though not enough to raise them to normal levels. In addition, the rains boosted prospects for a late hay cutting and lessened livestock producers' fears of a critical hay shortage this winter. Such fears had prompted some District cattle producers to move up the marketing of their cattle, leading to lower-than-usual-market weights in recent weeks. In the fishing industry, an outbreak of the pfiesteria organism temporarily closed down commercial fishing on several rivers that drain into the Chesapeake Bay. The impact on the overall catch was not substantial, although demand for seafood was reported to be sharply lower.

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Last update: October 29, 1997