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Federal Reserve Districts

Fifth District--Richmond

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The Fifth District continued to experience modest improvement across most sectors since our last report. Manufacturing activity picked up some momentum, bolstered by solid shipments and orders. Our non-retail services indexes improved, albeit at a slightly slower pace than earlier. The tourist industry enjoyed increased bookings. Bankers reported rising loan demand along with improved credit quality. Both residential and commercial real estate contacts noted some gains from still-weak levels. In contrast to these positive reports, the agricultural sector was held back by adverse weather and the retail sector experienced softer sales. District employment improved somewhat. Prices were up only moderately from our last report. Commodity prices, however, moved significantly higher. While most sellers were not passing through cost increases yet, many expected to begin raising prices later this year.

Manufacturing activity continued to advance at a healthy pace in January and February. An aluminum extrusion manufacturer reported broad strength in demand for semi-finished metals, which are often an early indicator of increasing manufacturing activity. An auto-parts supplier said that new orders at his plant remained high and had increased to the point where finished goods inventories were below desired levels. He mentioned that raw material and component suppliers had started to have availability issues due to worldwide demand (especially from China and India). A custom fabricator reported that his company was seeing acceleration in business and was also experiencing very competitive pricing in the market place. Several textile manufacturers to whom we spoke indicated that, while orders had strengthened considerably, raw materials prices were rising markedly, with no way for them to pass along the increase to their customers due to competitive pressures. Our latest manufacturing survey also indicated that prices of raw materials increased notably over the last month, while prices of finished goods were up more moderately.

Retail sales generally softened since our last report, although a few businesses noted flat sales or an uptick toward the end of February. Sales fell at apparel stores, auto dealers, appliance stores, and retail computer stores. In central Virginia, an executive from a hardware chain reported that sales were down, matching reports that we received from retail/wholesale building suppliers in Maryland and South Carolina. Contacts at department stores reported flat sales. In contrast, an auto dealer in the Tidewater area of Virginia said sales were "on the upswing." A West Virginia dealer told us that new car sales grew more rapidly in recent weeks. He noted that his service shop was also gearing up to meet increased demand for repair and maintenance of older cars. Finally, a few food and pharmaceutical wholesalers that we polled also reported faster growth in revenues. Retail prices grew somewhat more quickly in recent weeks, according to surveyed merchants, but many retailers anticipated a jump in price growth in the six months ahead. Retail wages rose, as more companies reported giving raises. A few executives and managers were apprehensive about their exposure to higher costs of healthcare benefits.

Revenues rose moderately at most services-providing firms, according to most District contacts. Executives at healthcare organizations cited normal seasonal demand for medical attention related to the flu, except in North Carolina, where some providers reported that demand for healthcare related to the flu was up notably from seasonal norms. Financial services businesses also reported somewhat stronger demand; a Richmond, VA contact remarked that the stock market is "giving folks courage," but he noted rising food and energy costs held down activity. Accounting and other business-to-business firms also reported an uptick. Average wages were flat at services firms and current price growth was mild, according to survey responses, but price growth was expected to accelerate over the next six months. An executive at a payroll service in West Virginia indicated that his prices will go up slightly in 2011, but noted that "times are still a little rough out there."

Loan demand in the District continued to improve in recent weeks. Several contacts reported that small business lending in particular had increased, with much of the demand coming from capital improvement needs. Demand from medium and large firms was mixed, with some bankers stating that both were requesting more loans, while other lenders' gains were limited to medium-sized businesses. Much of the demand from large businesses was for mergers and acquisitions. A banker in North Carolina noted a marked pick-up in consumer borrowing, mostly with respect to credit card usage, but added that many consumers were paying down debt. A loan officer in Richmond noted a sharp increase in home repair loans. However, several lenders around the District commented on the limited amount of mortgage activity--both for new homes and refinancing. West Virginia continued to lag, with one area banker reporting that loan demand was weak, and the high rate of repayments made sustaining loan volumes difficult. Most bankers were encouraged by recent improvements in credit quality, with several noting that the number of problem loans had declined. Another lender stated that healthy businesses in his area were starting to have more confidence in the recovery and had come back for loans.

Real Estate
Real estate activity improved slightly from low levels since our last report. Most realtors indicated that sales were about the same or up slightly, although an agent in the D.C. area said that the number of home sales had dropped during the last six weeks. Realtors across the District noted an increase in foot traffic, but reports of sales price changes were mixed. A real estate agent in Northern Virginia stated that prices continued to slip in February albeit less than a month ago. In contrast, an agent in the D.C. area reported that the median price was up moderately at the end of 2010. One contact said that the slight increase in mortgage rates had caused some buyers to act before rates rose higher. Sales activity varied by price range around the District, with most contacts indicating that sales were concentrated at the low end of the price range (although a contact stated that sales at the upper end of the price range were doing much better in his area). While several Realtors indicated that they had not seen any change in the proportion of distressed sales, contacts in Richmond and Greensboro noticed an increase in short sales and foreclosures during the past six weeks. Realtors generally were optimistic that housing sales would gradually strengthen over the next few quarters and prices would trend up slightly.

Commercial real estate experienced broad-based, but moderate improvement across the District over the last six weeks. Many contacts cited an uptick in activity leading to the closing of office, industrial, and retail deals. A Realtor in central Virginia stated that the increase in demand for suburban office space had real depth for the first time in years, although downtown demand remained weak. Several real estate management firms reported a growing demand for warehouse space. A Realtor on the Atlantic Coast noted that national retailers were expressing renewed interest in expanding space (and even hiring). And, a developer in West Virginia noted that further weakening of the local economy was holding back the local market, but conditions had not deteriorated in recent months. Prices of properties and leasing rates generally remained unchanged, according to contacts, due to continuing high vacancy rates.

Labor Markets
Temporary employment agencies gave generally optimistic reports on recent demand for workers and were upbeat about future demand. A Richmond agent noted that more of her company's clients were finding permanent jobs, and she was optimistic about strengthening demand for workers in the near future. Similarly, the branch manager of a temp agency in Raleigh reported that several manufacturing customers had hired his clients for full-time positions. Moreover, a Hagerstown agent mentioned that his firm was hearing more optimism from their customers than in the recent past. He said that, "The recovery does not have a full head of steam yet, but it is clear that there is certainly more demand in many sectors of the economy." Nonetheless, several agents continued to report weak demand over the past six weeks, but they expected demand to improve over the next six months.

Contacts reported generally strong bookings during recent weeks, wrapping up the winter season on a high note. A Baltimore hotel general manager indicated that leisure group bookings were up and guests were returning to the lounge and restaurant; previously, visitors were cutting costs by eating at the coffee shop. In Virginia, the manager of a resort and conference center reported that sales of season ski passes nearly doubled compared to last year, and he noted that his organization was able to raise rates this year "with no resistance." A western North Carolina hotelier reported solid bookings for the weekend just before Valentine's Day, drawn in part by a widely attended event nearby. This is the off season for Mid-Atlantic beach rentals; however, a contact there reported that advance rentals rose since our last report, pushed by "value-added" incentives, such as price guarantees. The contact indicated that tourists were still dining out, but were more likely to use coupons, and that some high-end restaurants were "feeling the pinch." However, a West Virginia contact reported flat growth compared with a year ago, and he noted that customers waited to book until the last minute, as they monitored weather reports--thus, forfeiting any advance booking discounts. Looking ahead, most contacts expected a slowdown during the early spring "shoulder season."

Colder-than-normal temperatures coupled with dry weather conditions throughout much of the region limited field work, hindered crop development, and caused farm income to decrease since our last report. In North Carolina, continued cold weather slowed field work, and freezing conditions and cold temperatures challenged livestock producers in Virginia and West Virginia. In many instances, livestock producers secured water sources by breaking ice in order to water their cattle. In addition, below normal temperatures in Virginia slowed development of winter wheat, although small grain crops in West Virginia were reported as looking better. Results of our recent agricultural credit survey indicated that income projections weakened somewhat as a result of the volatility in commodity prices and input costs, and that farmland values were below the previous quarter and year-ago levels.

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Last update: March 2, 2011