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Federal Reserve Districts

Fifth District--Richmond

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District economic activity grew more slowly in recent weeks, as a continued decrease in housing activity was joined by some downshifting in the manufacturing and retail sectors. District housing markets, while still relatively strong, continued to soften as sales slowed in many areas; real estate agents anticipated a further downward drift in prices. In May, factory output nearly flattened following several months of growth, with new orders decelerating sharply as well. Services firms and tourist establishments noted somewhat faster growth in their revenues, but retailers reported weaker sales. Despite evidence of softening economic activity, District labor markets remained strong outside of decreased hiring by factories. On the price front, upward pressures pulled back somewhat in May, though manufacturers told us that sharply higher input prices squeezed margins and many would attempt to raise their prices going forward. On District farms, generally dry weather assisted planting efforts but had little negative impact on crops as yet.

Revenues at services firms grew at a faster pace since our last report. Financial services contacts in Richmond, Va., and Baltimore, Md., told us that business remained strong, though they noted increasing caution among their clients as interest rates rose and real estate markets slowed. A North Carolina-based trucking contact said customer demand remained solid and that a new distribution center near Greensboro would likely boost the area's economy going forward. Turning to prices, contacts at service-producing businesses reported that the pace of increase moderated somewhat in May, but they looked for price growth to quicken in coming months.

Retail sales generally grew at a slower pace in May, though some contacts noted that sales began to pick up at mid month as warmer weather took hold. In South Carolina, contacts at two large building supply businesses said the pace of sales declined in May as construction activity slowed and energy prices rose. A chain department store manager in Virginia Beach, Va., said business at her store had been good, but that stores at other locations had not done well in May. In contrast, a central North Carolina department store manager noted that his sales firmed around Mothers Day and continued strong for the remainder of the month, leaving his non-seasonal inventory "a little light." And a contact at a regional hardware and building supply chain added that his late May revenues were boosted by sales of generators and shatter-resistant windows ahead of the hurricane season. Contacts reported that retail price growth eased slightly in May.

District manufacturing activity flattened in May following a marked pickup in March and April. Shipments, new orders, and capacity utilization grew more slowly last month, while employment and order backlogs contracted. Among industries, furniture, rubber and plastics, and transportation equipment reported the biggest declines in output. Manufacturers noted a softening in hiring after several months of moderate payroll increases. In addition, the average workweek declined, although wages maintained the solid trend of recent months. Contacts said raw materials and finished goods prices increased less rapidly than in our last report. But manufacturers remained alert to increasing price pressures, and many planned to raise their prices in coming months. A North Carolina plastics producer, for example, said that his company's margin was too thin and the firm would work to get their prices up.

District bankers reported a dichotomy between residential and commercial lending. Demand for residential mortgages decreased while commercial lending remained strong. Most mortgage lenders attributed the deceleration in residential demand to rising interest rates. A Charleston, S.C., banker noted that increasing mortgage interest rates had slowed lending, especially on second mortgages and re-financings. In contrast, commercial lenders reported activity remained fairly robust, noting that loan pricing remained highly competitive. Typical of the reports was that of a Charleston, W.Va., lender who said that his bank "sacrificed some on the yields in order to maintain market share."

Real Estate
Residential real estate agents across the Fifth District reported that housing markets remained generally strong, though sales, traffic, and prices continued to slow in some areas. Real estate agents in Odenton, Md., and in Washington, D.C., each reported slower home sales. The Washington, D.C., agent reported a continued decline in contracts and in buyer traffic. He told us that residential re-sales were down sharply, and that market inventory had tripled from year-ago levels. In contrast, a realtor in Greensboro, N.C., reported that home sales remained "pretty good," and Richmond and Virginia Beach, Va., agents reported healthy activity though the properties were not moving as quickly as a year ago. Most real estate agents told us that prices were holding steady although there was some indication that softening was becoming a bit more widespread. Low- to middle-price homes continued to be the best sellers throughout the District.

Commercial real estate agents reported continued growth in leasing activity. Gains were generally concentrated in the industrial sector, with office and retail leasing also remaining fairly strong. Agents reported little change in vacancy rates, which continued to be tight across the District. A retail contact in Richmond, Va., reported that there had been "a lot of absorption due to a lack of major projects." Agents also noted an increase in rent, especially for office space.

Tourist activity strengthened since our last report. Contacts at hotels along the District's coast told us that bookings for the Memorial Day weekend--aided by near-perfect beach weather--were much stronger than a year ago. Tourism at mountain resorts in Virginia and West Virginia was also stronger. A manager at a mountain resort in Virginia said demand remains so strong, they are offering fewer discounts. In contrast, a hotelier at Virginia Beach indicated that she had to offer more discounts on selected rooms in order to fill their hotel.

Temporary Employment
Temporary employment firms in the District generally reported stronger demand for workers in April and May. An agent that serves Washington, D.C., and Maryland continued to report that they experience a "generally hot economy," making it more difficult to find qualified workers. Likewise, in Raleigh, N.C., an agent told us that a pick-up in the local economy had boosted the demand facing his firm, but a lack of qualified workers could hamper their ability to ramp up production. High-end administrative and specialty skills, clerical, and forklift skills were highly sought.

Dryer-than-normal weather widened the planting window for District crops in recent weeks. Cantaloupe, tomato, and watermelon plantings were well ahead of schedule in South Carolina, and great progress was made in planting peanuts and soybeans in Virginia. Despite the dry conditions in some areas of Virginia and the Carolinas, agricultural analysts characterized crop conditions as "fair to good" throughout the District. In addition, with drier conditions, livestock and pasture conditions deteriorated somewhat in South Carolina but were reported to be good in West Virginia.

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Last update: June 14, 2006