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Federal Reserve Districts

Fifth District--Richmond

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Fifth District economic growth remained sluggish in the weeks since our last report as modest growth in the services sector was tempered by sluggish growth in retail sales. Retail sales increased modestly in November, but growth was sluggish on balance, in December. Services businesses reported moderately higher revenues in November, but a leveling of activity in December. In manufacturing, shipments were flat and new orders showed fledgling growth in the weeks since our last report. District home sales remained exceptionally strong, but leasing in the commercial real estate sector was sluggish. Price pressures remained modest throughout the District's economy. In agriculture, above-normal rainfall slowed cotton and soybean harvesting and limited plantings in many areas.

Retailers in the Fifth District characterized pre-Christmas sales growth as relatively weak, though most contacts said that sales growth in the post-Christmas period was strong. A contact at a large department store chain with a presence throughout the District said holiday sales were "not remarkable," though he noted that this year's sales growth was about even with last year's. A department store in the lowlands of South Carolina and a big-box retailer in the Tidewater area of Virginia echoed the same theme. But post-Christmas sales were stronger than a year ago, driven, in part, by a wider use of gift certificates. Expecting additional gift certificate redemptions, District retailers anticipated increased sales for the coming two months. Outside of retail stores, automobile dealers across the District had slow sales growth in December in spite of factory incentives, but most expected sales activity to pick up in January.

District services businesses generally reported "steady" customer demand since our last report. Executive search firms in Virginia, Maryland, and D.C., said client demand has been unchanged in the last four to six weeks. Having several advance bookings, a West Virginia caterer was pleased with their current business level, but expressed some apprehension about the effects of a "down economy" in the coming year. On the downside, a large nonprofit facility in Washington, D.C., said demand for childcare--their biggest service--had declined, as members looked to cut their personal budgets by finding alternatives.

Manufacturing activity was steady in November and December as shipments were nearly flat and new orders expanded at a modest pace. Some plant managers saw improvement. A Maryland producer of electronic equipment reported that shipments picked up in December because of stronger orders from a large discount retailer. In addition, a manufacturer of plastic goods in South Carolina noted that his market had "cleansed itself of weaker companies" and now his firm could "put up the sail and go with the wind." In contrast, apparel and textile manufacturers saw no improvement. Contacts in these sectors reported weaker demand for their products. A manufacturer in North Carolina said that his customers were not building inventory because they expected consumer spending to remain slow. In District labor markets, manufacturing employment continued to contract in recent weeks, while average wages rose at a moderate pace. On an optimistic note, however, manufacturers reported that the workweek edged higher in December--the first growth in six months.

District loan officers said that loan demand changed little since our last report. In a familiar refrain, contacts reported that commercial lending remained generally weak. Commercial bankers said that the sluggish economy and the possibility of war with Iraq made businesses hesitant to borrow. A commercial banker in Virginia noted that borrowing by municipalities and institutions of higher education was relatively strong, but she added that demand from private sector firms had flagged. Another banker reported generally weak activity among his private sector clients, except, interestingly enough, beer and wine retailers. "People drink more in a bad economy," he surmised. Residential mortgage lenders continued to report brisk mortgage lending. A Richmond, Va., banker reported a "flurry of refinancings" in December because, he believed, people were expecting rates to tick up in the new year.

Real Estate
Residential realtors reported continued strong growth in home sales in recent weeks. A Washington, D.C., agent described that area's real estate market as "tremendously active," with home sales far surpassing year-ago levels. Likewise, an agent in Odenton, Md., said December sales were fantastic, despite the area snows that damped customer traffic through homes. She reported a low inventory of homes in the low to midpriced range--her "hottest" market right now. A Herndon, Va., agent said sales of high-end homes were good, but he noted that it was difficult to find lots on which to build homes. House prices remained generally steady across the District.

In the commercial sector, realtors reported sluggish leasing activity in recent weeks, though they attributed much of the lull to a customary seasonal slowdown. On the industrial front, a Charlotte, N.C., contact summed up conditions in the sector as "slow to partly cloudy." Demand for office space also remained sluggish across the District, but a contact in Greenville, S.C., reported that while interest in purchasing property by occupants remained low, investor interest continued to rise. The supply of vacant space across market sectors varied little from our last report. Likewise, rent levels were generally unchanged in the office and retail sectors. In the industrial market, however, contacts noted that landlord concessions were more widespread for warehouse space. Despite the holiday stall, a number of contacts voiced optimism about the coming year.

Tourist activity was strong at District ski resorts but softer along coastal areas in recent weeks. Contacts at several ski resorts told us that colder temperatures and ample water for snowmaking allowed them to open about three weeks ahead of schedule. A Virginia operator said that bookings were about 20 percent higher than a year ago, as people wanted to ski closer to home this year. According to him, skiers were spending "like there is no tomorrow." His counterpart at a mountain resort in West Virginia also reported stronger business in December but noted that patrons were waiting until the last minute to book. Tourism in coastal areas was somewhat weaker since our last report. A hotelier in Virginia Beach said their New Year's Eve promotion did not sell out this year, unlike last year when reservations for the event were completely booked by the middle of December.

Temporary Employment
Contacts at District temporary employment agencies reported somewhat stronger demand for workers since our last report, though the pickup was centered in higher demand for seasonal retail workers. A Raleigh, N.C., agent cited retail and tourism as the primary drivers of increased hiring, but added that his agency had received a big boost in business from a client as well. While most agencies noted modest increases in hiring, several said that demand for temporary workers was lower than a year ago. However, even among those agencies, most were optimistic that business would strengthen in the new year.

Excessive rainfall in November and a major ice storm in December slowed harvesting activity and limited small grain planting in most of the District. In North Carolina, both cotton and soybean harvesting were behind schedule. Peanut, cotton, and soybean harvesting slowed markedly in Virginia because of the excessive precipitation. In contrast, cotton harvesting in South Carolina was virtually complete, but yields were below normal. Planting of small grains was delayed in North Carolina and Virginia because saturated fields couldn't accommodate farm equipment.

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Last update: January 15, 2003