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Federal Reserve Districts

Fifth District--Richmond

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Economic activity slackened or remained soft across most sectors of the Fifth District's economy since our last assessment. However, severe winter storms throughout the District played an important role. Many consumers avoided driving during dangerous road conditions, causing weakness in retail sales (except for items such as food). One banker noted that even borrowers with pre-approved mortgage loans were unable to do much house shopping during the bad weather. Overall, the residential real estate market activity was generally viewed as mixed, although the commercial markets continued to weaken regardless of weather conditions. Tourism was also mixed, with heavy snows in the mountain areas contributing to booming activity at ski resorts, but keeping vacationers away from most other activities. Many manufacturers lost a few days of production during the storms, but were able to make up most of the lost production. Manufacturing shipments and backlogs, however, were largely unchanged over the last month, while new orders improved. Both manufacturing and service employment fell since our last report, although temporary employment agencies reported slight increases in demand, particularly among service-related occupations.

Retail revenues generally weakened since our last report, although a few merchants reported slightly higher sales. Big-ticket sales dropped sharply, including sales of automobiles and light trucks. Sales fell in many other categories; for example, a department store manager reported that customers were trading down from "label" apparel to the in-house brand. In addition, retail sales fell abruptly during recent major snow storms, although some of our contacts indicated that sales rebounded quickly as customers fought "cabin fever" by shopping when roads were cleared. However, many retailers were unable to recover lost sales and advertising expenses because those snow storms occurred on consecutive weekends. In contrast, District grocery sales rose, and the store manager at a chain discount retailer in North Carolina reported that sales of larger screen televisions were especially strong just prior to the Super Bowl football game and following the snow storms. Several store managers said their outlook for 2010 was more optimistic than in recent months, stating that raises and bonuses were on the table again after last year's freezes. However, merchants remained cautious in their planning, and inventory levels were being managed tightly. Retail wages rose on average, while price increases slowed.

Revenues fell at most District services firms in recent weeks, partly due to snow storms at the end of January and beginning of February. Virginia airports attributed a decline in enplanements to the bad weather, and District hotels and restaurants also reported a drop in customer traffic. In addition, CFO's and other executives at small businesses continued to express frustration at not being able to get loans. Architectural firms in Virginia and Maryland, as well as a few hospitals, reported an increase in consumer demand for services, however. Also, investment advisors and other financial services professionals indicated that revenues picked up in recent weeks, although overall business conditions remained mixed. A financial services contact reported that he was seeing a sense of optimism beginning to develop among his commercial clientele. Average wages inched up at services firms; price increases were mild.

District manufacturing activity was flat to up in February, with optimism for the near-term remaining guarded. Contacts on balance reported that shipments and backlogs held steady, while new orders posted solid increases. A textile producer said, "Business has definitely turned for the better." His company, however, was using fewer employees due to increased productivity. Similarly, a textile mill manufacturer reported that sales, production and shipments continued to improve and that business was looking good over the next two months. Moreover, a chemical producer noted that his company had seen an increase in all of his business lines and believed that this increase would be sustainable for the next 18 months. In contrast, a primary metal manufacturer indicated an uptick in demand, but was not convinced that the gains would continue because his backlogs had slacked off recently. Likewise, an apparel producer said that sales had increased because retailers were building inventories. He noted, however, that his company was not increasing wages and was reluctant to hire because he believed present demand was a blip and would not last beyond this summer. Several manufacturers reported production disruptions during the snow storms, but were able to make up the losses by working overtime and during holidays. Although most contacts reported that both raw materials and finished goods prices increased at a slower pace since our last report, lumber prices were higher across the board due to weather-related supply effects.

Lending activity in the District remained soft and little changed from our last assessment, although adverse weather in both January and early February was partly to blame. With businesses closed and home buyers reluctant to drive during the extended period of bad weather, especially in the northern half of the District, banks were getting few customers. Yet, even in areas less affected by weather, several bankers described loan demand as tepid. One large bank reported that commercial and industrial lending remained weak across all market lines. Another banker stated that a modest tightening of credit standards was making loan approvals more difficult. Bankers noted that, while businesses were increasingly calling about loans, few were ready to make loan applications due to the sluggishness of the economy. Nonetheless, one large bank did see a "bit of a thawing" among businesses that needed to replace capital, and a small bank stated that their one area of increased activity was in home equity loans. Most bankers stated that more improvement in the economy and particularly consumer spending would be necessary before loan demand would strengthen appreciably.

Real Estate
Fifth District Realtors reported mixed housing activity across the District, citing weather as a limiting factor in many areas. For example, a Greensboro Realtor noted lower sales since our last report, adding that recent weather conditions had "shut them down." Further, he cited the uncertainty of the economy as a big factor in holding down sales, and said this was the worst market he had ever experienced. Likewise, a Charlotte agent stated that, while house sales slowed in recent weeks, months' supply of inventory was also down markedly. However, a Fredericksburg Realtor reported that, in spite of the adverse weather conditions, sales in her market were equal to a year ago and indicated that, absent the weather, there might have been an improvement in market conditions. Several agents reported that home sales in the lower price ranges continued to benefit from first-time homebuyers, although there was also an increase in foreclosures and short sales. Agents in most localities reported that home prices were either flat or had dropped.

Commercial real estate activity in the District slowed across all segments of the market. Several contacts reported that office, industrial, and retail vacancy rates edged higher, putting more downward pressure on prices and leasing rates. One contact cited an increase in late payments and even defaults. An agent stated that several retail chain stores were having trouble getting financing to sustain their outlet expansion plans. However, local retailers were benefiting from less competition for leasing space in prime locations from national chains. Little or no construction activity was reported in most areas of the District. One exception that was noted included the construction of small industrial buildings such as auto services and parts shops.

Tourist activity was mixed, with weather again playing an important role. Contacts along the coast reported weaker bookings and noted that both occupancy and room rates were down considerably when compared to our last report and to a year ago. An analyst on the Outer Banks of North Carolina said that bookings for Valentines' and Presidents' Day weekends were somewhat below a year ago and attributed the weakness to major snowstorms to the north and ongoing concerns regarding the national economy. Looking ahead, however, she noted that rental bookings were up slightly and credited the increase to creative packaging such as throwing in free linens, gas cards and gift certificates to local restaurants. Respondents at ski resorts, however, continued to report that "business is booming," as record-breaking snowfalls resulted in an historically high number of visits. A manager at a ski lodge in Virginia stated that this Presidents' Day weekend had been the busiest in the past five years.

Labor Markets
Labor markets generally softened across major sectors in the Fifth District. Employment and hours at manufacturing firms on average continued to decline over the past month, while retail and service-providing industries reduced hiring but increased hours. Employment was held back, according to one manufacturing contact, by productivity improvements initiated earlier in the recession, and another manufacturer stated that temporary layoffs were continuing due to weak demand. However, temporary employment agents reported somewhat stronger demand during January and February than in previous months. One agent cited a slight increase in demand for contract workers in manufacturing, although construction-related suppliers continued to struggle. Most of the gains in temporary hiring were in service-related occupations, such as finance and other professional services.

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Last update: March 3, 2010