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Reports from around the District suggested that the overall pace of economic activity remained sluggish in May. The manufacturing sector continued to contract, and this has contributed to further loosening in District labor markets and an easing in wage pressures. Retailers reported modest sales growth and the continued use of aggressive pricing strategies. New automobile sales have been soft, particularly in the light truck segment. Buoyed by strength in Florida markets, the District's single-family residential market remained robust. In contrast, commercial real estate markets were mostly weaker. Demand for consumer loans eased slightly, but mortgage activity continued to be strong. Reports on the tourism and hospitality industry were cautiously optimistic.
Consumer Spending
Retailers continued to report that sales growth has been modest at best, although most indicated that inventories were balanced. Among May's strongest sellers were seasonal clothing items and some home-related products. Sales of luxury items remained weak. Overall, merchants anticipated only modest sales growth through the end of the second quarter despite the continued use of aggressive pricing strategies.
Automobile sales during April and May have generally disappointed District dealers, but with some variation across product lines. Price discounting and sales promotions remained in force. Reports indicated that inventories of some light trucks were higher than normal.
Construction
The District's single-family market improved modestly in May, but remained flat overall compared with a year ago. In south Florida, very strong demand coupled with low inventories contributed to continued price escalation. District industry contacts anticipated little overall increase in pace of sales and construction over the next few months, and expected some softness in higher price segments of the market.
At the same time, commercial real estate markets continued to experience weaker demand. In some locations a surplus of sublease space has emerged, and some new buildings have been completed without tenants in place. This has resulted in increased vacancy rates and notable price reductions. Developers and lenders have reportedly become increasingly cautious about new office and industrial development, and several new retail projects have been delayed or put on hold. Similarly, District multifamily development has slowed significantly as vacancy rates have increased in several locations.
Manufacturing
The factory sector continued to contract in May. Excess inventories remained a problem for many District manufacturers. Expansion and hiring plans have been put on hold in several industries, although the pace of layoffs appears to have slowed during May. Reports showed continuing problems in the textile and paper industries because of reduced demand and foreign competition, whereas Petro-chemical companies in Louisiana have been hurt by high natural gas prices. A producer of capital equipment said that new orders have fallen sharply from last year. A large telecommunications company has announced layoffs, and a car manufacturer reported plans to slow production and has eliminated overtime. A producer of household appliances also noted a reduced workweek and some layoffs. Activity in the oil and natural gas industry remained robust, and recent lumber price increases have benefited ailing lumber firms.
Tourism and Business Travel
Reports about the tourism and hospitality industry remained positive, but were a little less upbeat than in recent reports. In south Florida, bookings for the summer tourist season were off to a slower start than last year. Reported overcapacity in the cruise industry has led to substantial discounting in order to attract customers. Some Florida contacts were concerned that high gasoline prices would slow tourism in their area, and the strength of the dollar may be slowing the flow of European tourists. Tourist activity along the Mississippi Gulf Coast was slower than last year, but the outlook in New Orleans remained very positive. A decline in commercial air travel continued to be reported in most locations.
Financial
Loan activity varied by sector and location. Consumer loan activity eased slightly and financial institutions noted some tightening in approval standards. However, mortgage lending and refinancing continued to be strong in most of the District during May. In contrast, commercial lending remained subdued and few large commercial deals were reported.
Wages and Prices
Labor markets continued to loosen in May, and wage pressures eased. Some contacts reported that it was easier to hire labor than it was six months ago. However, there remained a severe shortage of nurses in the region, and a new initiative has been implemented by some District hospitals to hire nurses from abroad. Reports noted that new employees in technology firms were being offered smaller compensation packages than last year.
No significant general price escalation was reported. However, the price of lumber increased in May as suppliers to the construction industry worked to build up depleted inventories and as some foreign competition eased. Natural gas prices remained elevated, and contacts again reported increased health care costs.
Agriculture
Market conditions have been mixed in the agricultural sector. Farmers in Georgia and Florida noted that low crop prices and higher production costs have hurt profits compared with last year. On a more positive note, the District's large poultry industry has benefited by increased export shipments as consumers in many parts of Europe have shifted away from red meat consumption.
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Richmond