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Federal Reserve Districts

Fifth District--Richmond

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Economic activity in the Fifth District continued to post moderate gains across most sectors from weak levels. Manufacturing continued to be a bright spot, with contacts indicating slow-but-steady expansion across a broad range of industries. Banks and other services-providing firms, also cited improvements over the last six to eight weeks, with scattered reports of weaker activity. For example, several professional services firms reported rising revenues, but an executive at a large healthcare organization stated that demand was weaker than expected. The real estate market sent mostly positive signals. In a striking change from recent months, several contacts noted a pickup in the high end of the market. Retail sales activity was virtually unchanged in recent weeks, but auto sales improved. While several temp agencies reported improving demand, other labor market indicators were weak. Slight increases in commodity and component prices were noted by manufacturing and services firms.

Retail sales generally flattened in recent weeks, but there were a few reports of improvement. Department stores overall reported no change in sales, and retailers in areas with high unemployment indicated that their sales continued to be held down by jobless customers scrimping on purchases. However, a retail representative in central Virginia noted an uptick and said that people were now spending on a wider variety of goods compared to a year ago when customers were "just buying the bare essentials." In addition, grocery, home improvement, and garden supply retailers reported accelerating sales. Auto dealers in West Virginia and South Carolina also reported a pick-up in sales and said that manufacturers have not been able to gear up fast enough to keep up with dealers' orders for domestic and foreign nameplates. Other big-ticket sales remained in a slump, however. Retail prices rose slightly faster since our last report.

Revenues at services-providing firms rose more quickly than last month, although a few contacts continued to report weakness. Transportation services firms reported stronger business, and enplanements rose at District airports. Executives at trucking firms noted stronger revenues, in part from the ability to raise prices in some markets. In addition, contacts at professional, scientific, and technical services firms reported rapidly rising revenues, and call centers in North Carolina cited expanded hiring. In contrast, an executive at a large healthcare organization noted that customer demand for services was "a little soft" relative to plan because the flu season was not as severe as expected. Services firms related to building construction also continued to report a down market. Aside from trucking, price changes at services firms were essentially neutral over the last month, with most contacts reporting no change in recent weeks.

District manufacturing activity continued to expand. Overall, manufacturers reported that shipments edged higher and new orders advanced at a solid pace, while employment grew at a slower pace. An auto parts supplier noted that orders continued to increase more quickly than expected, which resulted in rush orders for foreign and domestic materials. Similarly, another manufacturer of automotive components indicated that his company was still experiencing significant unforeseen demand from the auto sector. He also noted that his non-auto related business was finally starting to recover as well. Moreover, a number of lumber companies reported their orders had increased because their customers were rebuilding inventories. Accordingly, the increased demand resulted in a small profit for their firms for the first time since early 2007. A manufacturer of door components reported that revenues were 10-15 percent above the lows of 2009. Contacts also stated that raw material lead times had increased. Prices of raw materials increased at a slightly quicker pace than a month ago, while finished goods prices grew at a somewhat slower pace than earlier.

Banking activity in the District remained generally weak since our last assessment. However, several respondents stated that their lending activity over the last few months was up moderately in at least some segments of their markets. Consumer lending was described by one banker as up from earlier in the year and another banker cited increased use of credit cards. Industrial loans were little changed in recent months, as businesses kept a tight control on inventory and were cautious about investing in new equipment. Several mortgage bankers stated that applications dipped after the homebuyer tax credit expired at the end of April, but one banker noted that activity recovered in the second half of May. While some bankers saw no improvement in higher-priced home sales, several lenders reported significant improvements in that segment from extremely low levels. Credit quality was little changed, although one banker reported increases in 30-day delinquencies. Other bankers stated that, on balance, quality was improving because bad loans were being taken off their books.

Real Estate
Residential real estate markets across the District continued to strengthen. While most of the gains were in the low-to-mid price range, activity inched up for higher priced homes in several areas. Properties in the mid-to-upper price range sold very quickly in the D.C., area, with the best sellers in the $800k-$1.1M range. The inventory of unsold homes there was at its lowest level in eighteen months. Several agents reported getting multiple offers on properties. Concern that interest rates would rise once the homebuyer tax credit expired had pushed some people to purchase homes. House prices held steady across much of the District, but they increased somewhat over the last 30 days in Fredericksburg, Va., where a shortage of inventory and multiple contracts were noted.

Commercial real estate agents reported modest improvements since our last report.

For example, vacancy rates for office space in Columbia, S.C., and Charlotte, N.C., markets decreased due to positive absorption, but were stable in Richmond. Leasing activity eased in Charlotte and demand was unchanged at a weak level. A slight pick-up in retail leasing was reported in Richmond. Rental rates remained stable in most sectors. New construction remained generally nonexistent. However, a construction contractor reported starting a 100-percent speculative office building in a suburban area and indicated he would like to start a second one in the near future. He felt confident that the new buildings would attract tenants shying away from more urban locations.

Tourist activity along the coast was either unchanged or up slightly from a year ago, and mountain resorts reported generally improving conditions. Contacts on the Outer Banks of North Carolina and in Virginia Beach said that bookings over the Memorial Day weekend were somewhat stronger when compared to earlier expectations. One contact from the Outer Banks noted that attitudes were definitely improving. Tourists were starting to eat out more and attending ticketed events again. While an analyst in Myrtle Beach indicated that increased promotion was attracting more visitors, spending levels continued to be quite low. Managers at mountain resorts reported that holiday bookings were somewhat stronger than last year. They attributed the increase in reservations to people staying closer to home, which allowed tourists to spend more at restaurants and events.

Labor Markets
Fifth District labor markets remained soft, but temporary employment agents cited recent gains. While several services firms reported that hiring was picking up, job cuts continued at many retail establishments. No change in the number of employees was noted in most manufacturing industries, but several contacts reported cuts in weekly production hours. A Raleigh contact at a temp agency reported seeing a steady increase in demand for his clients, specifically in office support positions where demand had been lagging in previous periods. One respondent stated that temp employment among District auto- and metals-related manufacturers improved recently. Most temp agency contacts expected the demand for workers to continue to improve, citing a recovering economy and higher manufacturing orders. Wage growth picked up in retail and services businesses, but one executive said that manufacturing wages had not increased since 2007 and he did not expect them to change this year.

Rainfall brought much needed relief and improved soil moisture to most areas of the District, which helped revive pastures and field crops. However, dry conditions and inconsistent weather took a toll on crops and yield potential in other areas. For example, farmers expected low rainfall to reduce winter wheat harvests in South Carolina. An analyst in Virginia reported some fruit and vegetable damage due to near frost-level temperatures. Also farmers expected lower yields of hay because sporadic rainfall hampered production and curing. In Maryland, however, hay supplies remained adequate and pasture conditions were rated fair to good. In North and South Carolina, plantings of peanuts and soybeans were well on their way, and farmers in Virginia were busy planting sweet corn, cantaloupes, peppers and squash. The 2010 peach harvest has just begun in South Carolina and conditions are favorable for peach growers. Lastly, peach and apple conditions in West Virginia ranged from fair to excellent, with most orchards in good condition.

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Last update: June 9, 2010