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District economic activity grew more slowly in recent weeks, as a continued
decrease in housing activity was joined by some downshifting in the manufacturing
and retail sectors. District housing markets, while still relatively strong,
continued to soften as sales slowed in many areas; real estate agents anticipated
a further downward drift in prices. In May, factory output nearly flattened
following several months of growth, with new orders decelerating sharply as
well. Services firms and tourist establishments noted somewhat faster growth
in their revenues, but retailers reported weaker sales. Despite evidence of
softening economic activity, District labor markets remained strong outside
of decreased hiring by factories. On the price front, upward pressures pulled
back somewhat in May, though manufacturers told us that sharply higher input
prices squeezed margins and many would attempt to raise their prices going forward.
On District farms, generally dry weather assisted planting efforts but had little
negative impact on crops as yet.
Revenues at services firms grew at a faster pace since our last report. Financial
services contacts in Richmond, Va., and Baltimore, Md., told us that business
remained strong, though they noted increasing caution among their clients as
interest rates rose and real estate markets slowed. A North Carolina-based trucking
contact said customer demand remained solid and that a new distribution center
near Greensboro would likely boost the area's economy going forward. Turning
to prices, contacts at service-producing businesses reported that the pace of
increase moderated somewhat in May, but they looked for price growth to quicken
in coming months.
Retail sales generally grew at a slower pace in May, though some contacts noted
that sales began to pick up at mid month as warmer weather took hold. In South
Carolina, contacts at two large building supply businesses said the pace of
sales declined in May as construction activity slowed and energy prices rose.
A chain department store manager in Virginia Beach, Va., said business at her
store had been good, but that stores at other locations had not done well in
May. In contrast, a central North Carolina department store manager noted that
his sales firmed around Mothers Day and continued strong for the remainder of
the month, leaving his non-seasonal inventory "a little light." And
a contact at a regional hardware and building supply chain added that his late
May revenues were boosted by sales of generators and shatter-resistant windows
ahead of the hurricane season. Contacts reported that retail price growth eased
slightly in May.
District manufacturing activity flattened in May following a marked pickup in
March and April. Shipments, new orders, and capacity utilization grew more slowly
last month, while employment and order backlogs contracted. Among industries,
furniture, rubber and plastics, and transportation equipment reported the biggest
declines in output. Manufacturers noted a softening in hiring after several
months of moderate payroll increases. In addition, the average workweek declined,
although wages maintained the solid trend of recent months. Contacts said raw
materials and finished goods prices increased less rapidly than in our last
report. But manufacturers remained alert to increasing price pressures, and
many planned to raise their prices in coming months. A North Carolina plastics
producer, for example, said that his company's margin was too thin and the firm
would work to get their prices up.
District bankers reported a dichotomy between residential and commercial lending.
Demand for residential mortgages decreased while commercial lending remained
strong. Most mortgage lenders attributed the deceleration in residential demand
to rising interest rates. A Charleston, S.C., banker noted that increasing mortgage
interest rates had slowed lending, especially on second mortgages and re-financings.
In contrast, commercial lenders reported activity remained fairly robust, noting
that loan pricing remained highly competitive. Typical of the reports was that
of a Charleston, W.Va., lender who said that his bank "sacrificed some on the
yields in order to maintain market share."
Residential real estate agents across the Fifth District reported that housing
markets remained generally strong, though sales, traffic, and prices continued
to slow in some areas. Real estate agents in Odenton, Md., and in Washington,
D.C., each reported slower home sales. The Washington, D.C., agent reported
a continued decline in contracts and in buyer traffic. He told us that residential
re-sales were down sharply, and that market inventory had tripled from year-ago
levels. In contrast, a realtor in Greensboro, N.C., reported that home sales
remained "pretty good," and Richmond and Virginia Beach, Va., agents reported
healthy activity though the properties were not moving as quickly as a year
ago. Most real estate agents told us that prices were holding steady although
there was some indication that softening was becoming a bit more widespread.
Low- to middle-price homes continued to be the best sellers throughout the District.
Commercial real estate agents reported continued growth in leasing activity.
Gains were generally concentrated in the industrial sector, with office and
retail leasing also remaining fairly strong. Agents reported little change in
vacancy rates, which continued to be tight across the District. A retail contact
in Richmond, Va., reported that there had been "a lot of absorption due to a
lack of major projects." Agents also noted an increase in rent, especially for
Tourist activity strengthened since our last report. Contacts at hotels along
the District's coast told us that bookings for the Memorial Day weekend--aided
by near-perfect beach weather--were much stronger than a year ago. Tourism at
mountain resorts in Virginia and West Virginia was also stronger. A manager
at a mountain resort in Virginia said demand remains so strong, they are offering
fewer discounts. In contrast, a hotelier at Virginia Beach indicated that she
had to offer more discounts on selected rooms in order to fill their hotel.
Temporary employment firms in the District generally reported stronger demand
for workers in April and May. An agent that serves Washington, D.C., and Maryland
continued to report that they experience a "generally hot economy," making it
more difficult to find qualified workers. Likewise, in Raleigh, N.C., an agent
told us that a pick-up in the local economy had boosted the demand facing his
firm, but a lack of qualified workers could hamper their ability to ramp up
production. High-end administrative and specialty skills, clerical, and forklift
skills were highly sought.
Dryer-than-normal weather widened the planting window for District crops in
recent weeks. Cantaloupe, tomato, and watermelon plantings were well ahead of
schedule in South Carolina, and great progress was made in planting peanuts
and soybeans in Virginia. Despite the dry conditions in some areas of Virginia
and the Carolinas, agricultural analysts characterized crop conditions as "fair
to good" throughout the District. In addition, with drier conditions, livestock
and pasture conditions deteriorated somewhat in South Carolina but were reported
to be good in West Virginia.