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Federal Reserve Districts

Fifth District--Richmond

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Business contacts suggested that the Fifth District economy lost some additional momentum in late January and early February. District retailers reported that consumer spending continued to soften in recent weeks, while production activity at District factories slowed further. In addition, commercial lending activity moderated and demand for home mortgages remained weak, though contacts said increased refinancing activity provided somewhat of a boost. Assessments of District real estate markets were also downbeat - home sales continued to languish and commercial leasing activity cooled in several major markets. Feedback from other sectors was more encouraging, however. Tourist activity remained a bright spot and revenue growth at District service providers firmed in February. Port activity was mixed with increases in exports, but sharp declines in import volumes. On the employment front, labor market conditions in the District deteriorated a bit since our last report. Retailers and manufacturers cut jobs, services hiring was flat, and demand for temporary workers softened. Price pressures were elevated in recent weeks behind faster growth in raw material and energy prices.

Assessments of consumer spending were downbeat in recent weeks. Department store contacts across the Fifth District told us that retail sales languished in late January through the first three weeks of February. A spokesperson for several retailers operating in central Virginia said Presidents' Day sales were a "non-event" and that Valentine's Day revenues were well below their usual levels. Apparel sales were also lackluster according to store managers in Maryland and West Virginia. In addition, a contact at a national discount retailer in North Carolina commented that drought conditions in his region had damped demand for lawn and garden items. Big-ticket categories also slumped, particularly automobile and light truck sales. A contact at a dealership in West Virginia said, "it's rough out here" and noted that he saw little to no customer traffic on his lot unless there was a "major" sale. Despite soft activity, retail prices grew at a faster clip in recent weeks, while District merchants continued to trim payrolls.

Contacts at District services firms reported generally steady to slightly higher customer demand over the past six weeks. An executive at an advertising firm in Richmond, Va., said revenues at his firm grew more quickly in recent weeks, as new businesses continued to locate to the region. Similarly, representatives from several Virginia airports reported higher passenger volumes and increased revenues in late January and February. Contacts at telecommunications and healthcare firms also reported a pickup in demand. The pace of hiring at services firms was unchanged, while price growth edged higher.

District manufacturers reported that production activity continued to cool in late January through the first three weeks of February as volumes of new orders and shipments dwindled further. Contacts attributed the pullback to a number of factors: a chemical producer in North Carolina cited "general economic uncertainty" among his customers; a contact at a textile mill in South Carolina blamed weak retail sales; and a building supply manufacturer in West Virginia noted ongoing softness in new home construction. Contacts also continued to voice concerns over rising energy and transportation costs. A textile producer in North Carolina told us that recent increases in raw material prices have been "very painful" and that his firm has "no ability to pass them along to retailers" because domestic demand has been generally soft.

Export activity at District ports intensified in recent weeks as overseas demand for U.S. goods continued to be driven by the lower dollar. On the flip side, port officials told us that import volumes from China continued to dwindle in late January and February. Contacts attributed the slowdown to ongoing weakness in home construction activity and softer retail sales, noting that furniture, apparel, and building material imports were down sharply.

Residential lending activity picked up in recent weeks as lower interest rates spurred a notable increase in refinancing activity. A contact in Greenville, S.C., said demand for mortgage refinancing at her firm was "twice what it was a month ago," while a lender in Charlottesville, Va., told us he had been "really busy with refinances." Similarly, a contact in Baltimore, Md., told us that February was on pace to be a "record-breaking month" in terms of refinancing activity. On the other hand, lenders said that recent rate cuts had done little to boost demand for home mortgages as tighter credit standards and weak demand for homes overshadowed the rate decreases. Several lenders said they had reduced loan-to-value ratios and were requiring higher credit scores on new home mortgages. Reports on commercial lending were more downbeat as loan demand slumped in recent weeks. A contact in Charlotte, N.C., told us that weakness in residential lending had "finally started to spill over to the commercial side," while a contact in Charleston, W.Va., told us there was "a lot of reticence in the air" as clients were increasingly concerned about the health of the economy.

Real Estate
Fifth District housing market conditions continued to weaken since our last report. A Realtor in the Washington, D.C., area said his market was still "pretty bad," adding that January home sales were down 41 percent from a year earlier. Similarly, an agent in Raleigh, N.C., told us she did not believe that conditions had "hit bottom just yet," while a Realtor in Greensboro, N.C., described his market as "slow" and reported seeing more builders "giving away houses." There were a few "signs of life," however. A contact in Charlotte, N.C., noted an uptick in buyer traffic in recent weeks, while an agent in Richmond, Va., reported an increase in inquiries as buyers sought to "take advantage of lower interest rates." In addition, sales activity inside the Washington, D.C., beltway was relatively solid. Contacts said that home prices continued to soften in most markets and construction activity remained generally dormant.

Assessments of commercial real estate conditions were mixed in recent weeks. Conditions were notably weaker along the I-95 corridor between Richmond, Va., and Baltimore, Md., while reports from the Carolinas were generally upbeat. Contacts in the Washington, D.C., area said the pace of office leasing had "slowed to a crawl" in late January and February. In addition, agents reported that some recently completed office buildings along northern Virginia's Dulles corridor were not attracting tenants. On the other hand, contacts in Columbia, S.C., and in Raleigh, N.C., described demand for office space as "steady." Office vacancies edged higher in Baltimore, Md., and in Washington, D.C., but were "fairly stable" in the Carolinas. It was a similar story with rental rates. Rents were mostly firm in the southern half of the District, while a contact in the northern Virginia suburbs reported downward pressure on office and retail rents, and said he was advising clients "to take what they can get." Contacts reported little to no new construction activity, and agents in Richmond, Va., and in Washington, D.C., told us that several national retailers had recently decided to delay new projects in those markets.

Reports on tourist activity were generally positive. Along the coast, contacts on the Outer Banks of North Carolina and in Virginia Beach, Va., told us that bookings for the Presidents' Day weekend were somewhat stronger than a year ago. A contact in Myrtle Beach said tourism spending at area establishments was in line with last year. Adding to the upbeat tone, a manager at a ski resort in Virginia reported that condominium sales remained strong, bookings were up and tourist spending was steady. Similarly, a contact at a West Virginia ski resort told us that sales of new homes at the resort were doing well and that bookings were on track for a record year.

Temporary Employment
Fifth District temporary employment agents reported somewhat weaker demand for workers in late January through the first three weeks of February. Contacts in Hagerstown, Md., and in Cary, N.C., told us that staffing requests had tapered off in recent weeks due to the "slowing economy." Demand held up a bit better in Richmond, Va., but an agent there said she was expecting hiring activity to drop off during the next six months. Administrative and computer skills remained among those most highly sought over the past six weeks.

Reports from District farms were generally unchanged in recent weeks. Severe drought conditions persisted in the Carolinas, despite recent, substantial rainfall in those areas, while pasture conditions continued to improve in Maryland and in Virginia. Although the recent rains did not fully compensate for months of drought, contacts said the precipitation improved the condition of small grains across most of the District.

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Last update: March 5, 2008