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Fifth District economic activity continued to advance at a healthy pace during the past two months. Retailers reported robust sales and brisk shopper traffic but services providers gave mixed reports. In manufacturing, shipments rose modestly and producers expressed more optimism regarding future business prospects. Real estate activity in the District continued upbeat, despite a somewhat slower pace of expansion in commercial activity in some areas. Loan demand remained generally strong across the District. Mild weather in January and February helped District crops and boosted tourist activity at coastal resorts but reduced patronage at ski resorts. Labor markets tightened, although wage increases remained moderate. Prices changed little in manufacturing and rose only slightly in the services sector.
Retail
Warm weather and unusually large post-holiday price discounts sparked a sharp rise in retail sales in recent weeks. Shopper traffic was particularly brisk in February and sales of big-ticket items picked up. Furniture sales were notably strong, benefiting from a robust housing market. One Northern Virginia furniture retailer commented that "almost all of our sales have been to people who just closed on a new house." Sales of winter apparel, however, remained lackluster. A department store manager in Charleston, W.V., complained that it had been "too warm; we weren't able to sell winter goods at any price!" Inventories rose as apparel retailers ordered larger-than-normal shipments of spring lines, signaling their optimism regarding sales in upcoming months. Despite their expectations of strong demand, retailers continued to say that they had no pricing power; many reported trimming workforces in an effort to control costs and hold the line on prices.
Services
Services sector activity has been mixed across industries since the beginning of the year. Electric and gas utilities reported declining revenues because of unseasonably mild weather. Business services and hotels, however, enjoyed substantial revenue growth. A hotelier in Baltimore, Md., attributed higher revenues to increased automobile and air travel. Employment in the services sector fell in recent weeks and wage pressures declined, but prices were little changed. Services providers remained optimistic about the demand for their services in coming months.
Manufacturing
District manufacturing activity strengthened since our last report. New orders and order backlogs grew more quickly in February and capacity utilization rates rose for the first time since October. Manufacturers reported increased shipments, particularly of lumber, furniture, paper, and food. A North Carolina furniture producer told us that he expected strong furniture sales to continue this year because housing starts remained buoyant and unemployment remained low. Manufacturing employment in the District was little changed in January and February despite increased layoffs in the textile industry. Producers reported a pickup in wage growth, but indicated that their prices remained flat. Looking forward, most manufacturers were more optimistic regarding the growth of shipments and new orders during the next six months.
Finance
District loan officers reported generally steady lending activity since our last Beige Book. Solid growth in business activity generated brisk demand for commercial loans. Commercial lending remained competitive; a banker in Virginia said that he had to be "proactive" just to avoid losing his existing customers to an ever-growing number of rivals. Residential mortgage lending remained strong in January although the pace slackened somewhat in recent weeks as mortgage rates moved higher. A lender in Greenville, S.C., noted that higher mortgage rates made it more difficult for first-time homebuyers to qualify for loans. He speculated that further increases in mortgage rates could appreciably reduce loan demand.
Real Estate
Residential real estate activity expanded at a healthy clip in January and February. Realtors told us that homes in all price ranges were moving quickly and that a "seller's market" remained intact. Home sellers were said to be "getting their asking prices" in most areas, especially in Maryland, where multiple offers on properties were common. A realtor in Richmond, Va., remarked that the pace of house sales was "as fast as a race car." In some areas, strong demand for housing contributed to shortages of labor and building materials--particularly of drywall and insulation. Recent increases in mortgage rates have had both positive and negative impacts on residential real estate activity. A West Virginia realtor told us that some of her clients were getting nervous about rates going up and were trying to get in "under the wire," implying that higher rates may have stimulated activity there. On the other hand, a Charlotte, N.C., contact said that mortgage rate increases had caused "some weakness" in entry-level home sales in his area.
Commercial real estate activity also remained strong in recent weeks, although the pace of growth slowed somewhat outside of the Carolinas. A Washington, D.C., realtor said that people were simply "running out of steam" in his area. In contrast, activity in the Carolinas remained robust; one North Carolina agent likened the market there to a "runaway freight train." Competition for commercial space in the Carolinas has intensified in recent weeks. A Raleigh, N.C., realtor said that tenants were willing to pay additional "fees" in return for priority access to available retail space. According to a contact in Columbia, S.C., small tenants in that area were being "forced out of buildings" once their leases expired to make room for expansion by larger, more established tenants.
Tourism
Unseasonably mild weather in recent weeks had mixed impacts on District tourist activity. Tourism in coastal areas benefited; one hotelier on the Outer Banks of North Carolina, for example, reported that her resort was "booked to capacity" during Valentine's Day weekend. She also said several restaurants that normally close for the winter and reopen around Easter had opened early this year because of strong tourist traffic. Mild weather, however, contributed to lower revenues at several area ski resorts this winter. A contact at a Virginia resort that offers both ski and golf facilities noted that higher revenue from golfing had helped offset sharply lower revenues from skiing.
Temporary Employment
The demand for temporary workers picked up since our last report, exerting additional strains on the District's already taut labor markets. Most contacts at employment agencies told us that employers continued to complain about the shortage of workers, but so far, relatively few were offering substantially higher wages to attract employees. A greater number of agents, however, now say that they expect wages to rise at a quicker pace in coming months. A recruiter in Charlotte, N.C., remarked that employers will almost certainly need to raise wages if labor markets get any tighter. In his words, "the dam can only hold back the water for so much longer."
Agriculture
Above-normal temperatures generally benefited District farming activity. Warm weather helped small grain crops, which were reported to be unusually mature this year. Mild weather conditions also boosted winter pastures, reducing the demand for feed supplies by livestock producers. Due to the warmer weather, however, fruit trees in some areas showed signs of early budding, increasing the risk of spring frost damage to the District's peach and apple crops.
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Cleveland