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Fifth District economic activity advanced at a brisk pace in June and July. Retailers reported strong sales, particularly of automobiles, furniture, and apparel. Business services and tourism revenues strengthened, and District manufacturers stepped up production and hiring. At financial institutions, higher interest rates slowed mortgage lending but had little effect on the pace of commercial lending. The real estate sector remained generally strong; home sales advanced at a rapid pace and prime commercial property continued to be highly sought. Wages accelerated slightly in the retail sector but remained moderate in other sectors. Prices of manufactured goods were generally flat and other prices rose only modestly.
Retail sales surged in June and carried some of that momentum into July, driven by a pickup in big-ticket purchases. Automobile dealers said July was a particularly strong month; showrooms were busy and sales exceeded expectations. Furniture and apparel sales also grew faster in recent weeks. In contrast, sales at home centers and do-it-yourself stores weakened. Qualified retail workers remained difficult to recruit, resulting in a slight acceleration in wage growth over the last two months. A Charlotte, N.C., department store manager told us she was "willing to pay for quality workers but just couldn't find any." Prices at retail stores increased at a modest rate in June and July. Looking ahead, retailers anticipated strong demand for their merchandise over the next six months.
Revenues at service firms expanded briskly since the last Beige Book; business services and tourism receipts were especially strong in July. A Washington, D.C., hotel manager credited high levels of consumer optimism for his firm's exceptional receipts in recent months. In residential real estate, firms benefited from the decisions of "penultimate fence-sitters" to purchase a house now rather than risk higher mortgage rates later. Service firms added employees at a slower pace, in part because of a scarcity of technology-trained workers, but also because some firms anticipated a slowing of demand.
District manufacturing activity generally strengthened since our last report, but pockets of weakness remained. Shipments, new orders, and capacity utilization all rose more quickly in recent weeks. Production at industrial machinery, furniture, and printing and publishing firms was notably higher. An industrial machinery producer in South Carolina told us that an increase in electric utilities' demand for gas turbines would likely double production at his firm this year and triple it next year. In contrast, textile mills continued to lose market share; a textile producer in North Carolina said that his firm would soon lay off nine hundred workers as the company "shifted away from textile production and concentrated on other business lines." Manufacturing employment and the average workweek increased in recent weeks, but wages grew somewhat more slowly. Manufacturing prices were little changed; a contact at a food processing plant in Virginia said that recent price increases were "not holding" due to resistance in the marketplace.
District bankers reported that, while commercial lending remained generally strong in June and July, residential mortgage lending was slowed by higher interest rates. Robust business expansion continued to drive commercial loan demand; in the words of a Chesapeake, Va., banker "business deals are moving forward despite higher interest rates." However, residential mortgage lending stalled in recent weeks and mortgage lenders were less optimistic regarding near-term prospects. A Charleston, S.C., mortgage lender told us that business in his office had declined 25 percent in the last month while a lender in Greenville, S.C., noted that the slowdown in lending activity was "greater than expected." Several bankers reported that mortgage refinancing activity was sharply lower.
Reports from residential realtors and builders were mixed. Some builders and realtors said that new construction and sales had flattened, though the level of activity remained higher than normal. Other contacts, however, reported continued growth in housing sales in their areas. In Richmond and northern Virginia, expanding residential construction and sales were still generally being reported. In contrast, slower growth in home sales was reported in South Carolina. Shortages of drywall and brick continued to plague builders and the prices of drywall, insulation, and plywood rose further. In addition, builders across the District told us that their subcontractors continued to have difficulty finding qualified workers, particularly framers and brick masons. Wage increases, however, remained relatively modest.
Commercial real estate activity remained strong in recent weeks. Realtors in the Washington, D.C., area and in parts of North Carolina said that it was increasingly difficult to locate large blocks of Class A office space. A Raleigh, N.C., realtor said that he was busier now than four months ago as existing businesses continued to expand. According to him, entrepreneurial businesses and individuals had filled Class B space almost to capacity. In Washington, D.C., however, a realtor noticed a four-fold increase in available small rental space blocks, which he attributed to less expansion by area small businesses. In Wilmington, N.C., a realtor described what he saw as the "first cracks" in the local market--he said that he was spending more time chasing smaller, lower-quality deals.
Tourist activity strengthened further in June and July. Bookings for the Fourth of July holiday were much stronger than a year ago; one contact on the Outer Banks of North Carolina credited the well-publicized move of the Cape Hatteras Lighthouse for increased tourist traffic during the holiday. She noted that the move attracted over 250,000 tourists to Cape Hatteras during June and early July. In South Carolina, record-breaking attendance was reported at the annual Spoleto Performing Arts Festival in Charleston, held in late May and June of this year. Looking forward, contacts at District hotels and resorts expected tourist activity to remain strong through the end of the year.
Demand for temporary workers has remained high since our last report, and firms reportedly continue to scramble for qualified employees. According to temporary employment agents, technology-based industries still led the pack in the number of contingent workers demanded and many indicated that they have had even more trouble finding skilled workers in recent weeks. Firms continue to rely on a "temp-to-perm" hiring strategy, but not to a noticeably larger degree than a year ago. Wages increased only modestly; one Charlotte, N.C., agent commented that "companies will pay a good wage for a good worker--the problem is I can't find many." Employment agents do not foresee any slowdown in the demand for temporary workers over the next few months, nor do they expect a substantial increase in wages during that period.
Agricultural analysts reported that despite scattered rainfall in recent days, unusually hot, dry conditions persist across most of the District. Recent rains were not sufficient to replenish low topsoil moisture levels in most areas and crop yields will suffer--especially corn and soybeans. In West Virginia, 35 percent of farmers continued to supplement water supplies for livestock, and in Virginia some producers were "chopping" corn to supplement livestock feedings due to the poor condition of hayfields and pastureland.