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Economic conditions in the Sixth District weakened further in October through mid-November. Retail spending deteriorated, holiday sales expectations were bleak, and activity in the tourism sector declined. Residential real estate contacts indicated that sales and construction activity remained extremely weak. Average home prices in many areas declined, pressured by the large number of foreclosed properties for sale. Commercial contractors noted a further decline in nonresidential construction. Most manufacturing contacts noted reduced production and declines in new orders. Credit conditions remained tight for both businesses and consumers. Labor markets weakened further and holiday-related hiring plans were restrained. Cost pressures for businesses eased on declining commodity prices and weaker demand.
Consumer Spending and Tourism
District retail contacts indicated that they were more pessimistic in October and early November than in the previous report. While households benefitted from declines in gasoline prices, this did not appear to be enough to boost overall retail spending. Sales activity heading into the holiday season was described as weak, and expectations for December sales were somber. The majority of retail contacts reported that inventories were above plan. In an attempt to stimulate sales, several retailers noted that they have expanded store hours, increased advertising, and plan deeper discounts. Some stores have begun to offer layaways as an incentive for budget-conscious shoppers who are unable or unwilling to use credit. Automobile dealers observed that sales deteriorated further, and that traffic was well below year-ago levels. Several dealers noted that they were trying to boost fleet and lease sales in an attempt to offset declines in the retail market.
After being a relative bright spot in the District economy for most of the year, tourism activity deteriorated more recently. Reportedly, visitor numbers at tourist destinations weakened, and visitors were spending less per trip. Several cruise lines and resorts were aggressively discounting prices in an effort to boost traffic. Business travel was also down according to contacts in the convention industry.
Real Estate and Construction
Reports from homebuilders and Realtors indicated that new and existing home sales remained weak in October through mid-November. Many contacts reported that worsening employment conditions and the unavailability of financing was restraining sales. However, some markets, particularly in Florida, saw modest gains in sales over weak year-ago levels. District homebuilders continued to pull back on construction in the face of historically high inventory numbers. Home prices continued to soften in the District with contacts indicating that the large volume of foreclosed properties for sale was exerting downward pressure on new and existing home prices. According to District contacts, the outlook for residential sales and construction activity remains weak.
Most District commercial contractors continued to report declines in activity. More projects were postponed or cancelled because of funding constraints and weak economic conditions. Nonetheless, contacts also noted that more existing space had been put back into the commercial real estate market, particularly in retail. Going forward, most commercial real estate contacts anticipate softer leasing demand, while developers expect commercial construction activity to decline further.
Manufacturing and Transportation
Most manufacturing contacts reported declines in production and new orders during October and early November compared with a year earlier. The decline in production was exacerbated by a decrease in export demand. Many reports noted additional cuts to payrolls and hours, with most expecting weak conditions to persist into the new-year. Several firms remarked that they had scaled back their capital investment plans.
Transportation contacts reported lower shipments of automotive and construction materials, far offsetting modest gains in shipments of chemicals and coal. Most contacts reported that holiday-related shipments of consumer goods were down significantly from last year.
Banking and Finance
According to most banking contacts in the District, business and consumer lending activity decreased during October through mid-November. Credit conditions remained tight, and competition for deposits increased. Some contacts, especially in the real estate industry, observed that the restricted access to credit was forcing them out of business. Most banking contacts indicated that they did not expect credit conditions to change materially in the near-term as banks focused on repairing their damaged balance sheets.
Employment and Prices
District employment trends weakened further in October through mid-November. Several businesses noted that layoffs accelerated and that hours declined. Retailers scaled back holiday-related hiring plans because of weak sales expectations, although the negative reports were fairly widespread across most industries. For businesses that reported they were hiring, several indicated difficulty in recruiting workers because of increasing relocation costs resulting from having to sell an existing home.
Because of lower input costs and weaker demand, most District contacts reported that they did not plan on raising output prices. Contacts in manufacturing, business equipment supply, and construction mentioned that costs had stabilized after a long run of increases in recent years. Sources in the tourism industry noted difficulty raising prices because of a sharp drop in demand. Some retail and food service contacts reported a few instances of higher input costs, but also indicated that they were generally unsuccessful in passing these costs on to customers. Apart from some healthcare and other high-skilled technical positions, most contacts suggested that wage pressures continued to diminish.
Natural Resources and Agriculture
Energy industry contacts reported that much of the damage that resulted from Hurricanes Ike and Gustav to the region's oil, gas, and petrochemical infrastructure had been repaired by mid-November. Total production of oil and natural gas had not returned to pre-hurricane levels, however. Falling energy prices and tight financing conditions prompted several energy industry firms to consider cutting new investment and expansion plans.
Cotton farmers reported price declines despite the smallest regional crop in 25 years, which was a result of a drop in global cotton demand. While domestic poultry demand remained subdued, poultry producers experienced relatively strong export sales to Asia, Mexico, and Eastern Europe.
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Richmond