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Federal Reserve Districts

Fifth District--Richmond

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Economic growth in the Fifth District was subpar in the weeks since our last report as softness in the retail and manufacturing sectors persisted. Retailers reported that sales were sluggish with unusually rainy weather constraining shopper traffic in some areas. Nonetheless, retailers generally remained optimistic about sales prospects in the months ahead. District manufacturers--particularly those in the textiles and furniture industries--indicated that shipments and new orders again moved lower and that they continued to trim payrolls and hold the line on capital spending. Declining interest rates boosted mortgage lending and residential housing sales, but only slight growth was recorded in broad services sector activity. In agriculture, the incessant rainfall during May delayed planting activity and flooded crops in some areas. Although scattered reports of price declines in manufacturing were received, contacts generally indicated that prices grew modestly in most sectors of the District's economy.

Across the District, the unusually large number of rainy days in May generally weighed down store sales; contacts in the Tidewater area of Virginia, for example, told us sales were slow as did a department store in the South Carolina lowlands. A big-box discount retailer with stores throughout the District reported unchanged sales over the period, although "discretionary spending" on certain items such as electronics had fallen. But, there were scattered bright spots. The big-box contact said that despite a prolonged lull, mid-May spending on necessities rose at his stores. In addition, a department store retailer in Annapolis, Maryland, reported that their sales increased by double-digits in May because people cooped up by the weather were looking for reasons to get out of the house. District retailers were generally optimistic about sales in coming months and planned to hire summer help. A large bookstore in central North Carolina, for example, cited plans for seasonal hiring, as did a West Virginia car dealer.

Customer demand at services businesses grew modestly from mid-April through May though the experiences of individual firms varied. On the weaker side, an executive search firm in the Washington, D.C., area said business was the worst he had seen in thirty years, and a freight company in central North Carolina said customer demand had softened in May. In contrast, a sports complex in central North Carolina reported that attendance was flat, and a computer services firm in the Clarksburg, West Virginia, area reported unchanged demand. But a number of District services firms reported somewhat higher revenues. A computer firm in the Research Triangle region of North Carolina, for instance, said business had picked up recently.

District manufacturing activity contracted further in April and May. Manufacturers told us that shipments, new orders, and employment were all generally lower during the period. The District's traditional manufacturing industries--textiles and furniture--recorded particularly sharp declines. A textile producer in North Carolina told us that his plant was operating only four days a week now because of poor sales. He added that he did not anticipate a pickup in new orders in the months ahead. Several plant managers voiced concern about falling prices. A furniture manufacturer in North Carolina told us that lower prices were "everywhere in the furniture industry." A plastics manufacturer in South Carolina said that he was forced to cut prices to maintain market share. Although most manufacturers remained optimistic that business would pick up in the second half of the year, they said their plans for capital spending remained on hold until they saw an increase in new orders.

District loan officers said declining mortgage interest rates pushed residential mortgage lending higher, but that commercial lending was stagnant. As conventional thirty-year fixed-rate mortgage rates dropped below 5˝ percent, mortgage lending surged. A banker in Charleston, South Carolina, reported that he had all the residential mortgage business he could handle, and a counterpart in Greenville, South Carolina, told us he was "swamped" with loan applications. Commercial lenders were less sanguine, reporting that a "wait and see" attitude persisted among many of their business clients. A loan officer in Charlottesville, Virginia, noted that although there were a few signs of economic improvement in his area, businesses generally remained cautious about borrowing in the current economic environment. Several bankers in Richmond, Virginia, said they foresaw no signs of a pickup in commercial lending anytime soon.

Real Estate
Residential realtors across the District reported generally higher home sales in recent weeks. In some areas, housing markets displayed unprecedented strength. A Virginia Beach, Virginia, agent, for example, said that home sales were the best he had seen in his thirty-seven years in business. A realtor in Fredericksburg, Virginia, characterized sales there as "amazing"--the best in her twenty-seven years of experience. Although agents in Washington, D.C., Richmond, Virginia, and Greenville, South Carolina, were somewhat less upbeat, they also reported solid sales growth, particularly of low- to moderate-priced homes. District homebuilders noted that the persistent rains in April and May slowed construction activity but said that they continued to apply for a large level of building permits.

Commercial leasing and construction activity in the District was generally flat in recent weeks. Contacts reported that their clients remained hesitant to commit to real estate deals in the sluggish economy--a realtor in the Raleigh, North Carolina, area told us firms there had "no sense of urgency" to obtain additional space. The retail sector was one of the bright spots in recent weeks; retail vacancies remained low and rents held firm. "We are very upbeat [about retail]…things are headed in the right direction," remarked a realtor in Bristol, Virginia. In contrast, office leasing activity was slow and vacancy rates remained high. Industrial vacancy rates were also high and leasing activity in the sector was "very quiet."

Tourist activity declined modestly in April and May, slowed in part by rainy weather during the period. A hotel manager in Virginia Beach, Virginia., said that business during the Memorial Day weekend was somewhat below that of a year ago, and she attributed the decrease to bad weather and heightened concerns about terrorism. She reported that her hotel was discounting rates to attract visitors. A contact at a hotel on the Outer Banks of North Carolina told us that their occupancy rate was down about 8 percent compared with last year. On a brighter note, a contact at a mountain resort in Virginia told us that his resort was completely booked during Memorial Day despite the gloomy weather.

Temporary Employment
District temporary employment agencies reported lukewarm demand for workers in recent weeks. An agent in Raleigh, North Carolina, said that although some signs of economic recovery had appeared in the area, there had not been a sustained trend toward recovery and increased hiring. Many employment agents, however, expected the economy to pick up in coming months and looked for stronger demand for their workers to follow.

Cooler than normal temperatures and saturated fields prevailed in most areas of the District in recent weeks, delaying spring planting activity. Hay harvesting was behind schedule in North Carolina, Virginia, and West Virginia, and the planting of peanuts and soybeans was delayed in South Carolina. Small grain crops in some areas of Virginia were damaged by winds and rain and excessive moisture. Throughout the District, crop producers expressed concerns about disease outbreaks and crop quality.

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Last update: June 11, 2003