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Federal Reserve Districts

Fifth District - Richmond

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Most sectors of the District's economy continued to expand moderately in late October and November, and growth picked up noticeably in a few sectors. Retail sales grew faster after September's lull. Manufacturing output increased; however, the rate of expansion was tempered by a slowdown in some industries. In the financial sector, District banks indicated that demand remained strong for all loan categories. Activity in residential and commercial real estate changed little, although commercial contacts in a few areas reported heightened development and investment. Labor markets tightened further but, outside of the service sector, only scattered reports of higher wage growth were received. Prices for goods and services increased at slightly faster rates.

Retailers in the Fifth District reported that sales strengthened during October and early November, driven by stronger-than-normal sales of fall and winter apparel. In addition, there were scattered reports that customers were taking advantage of well-stocked stores to shop early for the approaching holidays. Seasonally-adjusted employment in the retail sector continued to edge lower, although the decline was more moderate. Despite widespread reports of labor shortages, wage hikes were somewhat less pronounced than in September. Retailers indicated that prices rose slightly faster than indicated in our last report.

Activity in the service sector expanded at a slightly lower rate since September. Real estate and wholesale trade revenues increased more slowly, while those for health service providers increased more quickly. Employment growth in the service sector remained steady. Sources reported heightened wage pressures, especially in financial services. Contacts continued to expect stronger demand for services in coming months. Compared to September, prices in the service sector grew at a slightly higher rate.

District manufacturers continued to post strong growth since our last report. The volume of new orders expanded at a somewhat more moderate pace, while that of shipments generally grew more briskly. Nevertheless, producers of electronic equipment, paper products, and furniture reported decreased shipments. Shortages of skilled workers continued to hamper manufacturing activity; wage growth remained strong. Both raw materials and finished goods prices rose at slightly higher rates than in September.

Tourist activity continued to strengthen during October and early November. Several sources said that increased convention bookings helped boost growth in their areas, while others attributed growth to a lengthening of the post-summer season. One Virginia Beach hotelier indicated that his normal fall discounts had been reduced, and contacts at many other coastal hotels and restaurants told us that they had extended their season this year. Some sources said that holiday bookings had not lived up to those of a year ago. Nevertheless, contacts were generally optimistic that bookings soon would pick up and that activity in coming months would be above normal. Hotel and restaurant prices were little changed since our last report.

Activity at District ports strengthened. Increased agricultural commodity shipments pushed exports higher, while inbound shipments of metals and ores boosted imports. A North Carolina contact reported that shipments of wood chips from his port declined because of a strike at a Canadian paper mill.

Temporary Employment
Employers made greater use of temporary employment agencies during October and early November. Shortages of workers, especially those with computer training, were widely reported. According to one agent in Charlotte, N.C., recruiters were taking advantage of recently announced layoffs to enlist workers with proven computer experience. Other sources indicated that employers were screening applicants more carefully after being "seriously burned" by poor performances of some recent hires. Wage pressures remained largely in check.

District banks reported little change in lending activity since our last report. Demand for consumer, commercial, and mortgage loans remained generally strong, but funds remained ample. A North Carolina banker said, "there is more money available now than I've seen in many years." Several bankers noted that profit margins in commercial lending continued to be squeezed by competitive pressures.

Residential Real Estate
Residential real estate activity remained healthy across the District during late October and November, although home sales waned in some localities. A Charlotte, N.C., realtor characterized the market in his area as "steady, but not a rocket ship." Homebuilders generally reported little change in housing starts and building permits; several contacts commented that low interest rates were helping to maintain the current level of activity. A Baltimore, Md., contractor noted "more competition and tighter margins" in the housing market there.

Commercial Real Estate
In recent weeks, commercial real estate activity changed little in most areas, but picked up in South Carolina and suburban Washington, D.C. Realtors in Columbia, S.C., cited a spate of commercial property sales to institutional investors. Institutions have recently purchased four large office buildings in Columbia's downtown business district. Contacts also noted strength in the office sector with one realtor in Washington, D.C., reporting that vacancy rates there had fallen to nearly one percent. Despite the large demand, there was virtually no new speculative construction. The current level of commercial rents concerned a Richmond, Va., contact who, believing that retail rents are "too high, [doesn't] see how people are going to afford them."

Rains in recent weeks delayed fall planting and harvesting activity across much of the District, according to agricultural analysts. Inadequate time between rains limited farmers' ability to get into their fields. Wet weather delayed the sowing of winter wheat, barley, and oats. Soybean harvesting activity was behind schedule in many areas, and some farmers reported yield reductions because of deteriorating crop conditions. In addition, cotton producers expected a reduction in the quality of their crop. On a positive note, the rains improved pasture conditions and reduced the current need for supplemental feeding of livestock.

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Last update: December 3, 1997