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Economic activity was sluggish in late May, according to reports from across the Sixth District. Merchants' sales did not meet expectations, but inventories were balanced. Auto sales were mixed despite generous incentives. Some softening was noted in District residential housing markets, but activity remained at healthy levels. Commercial markets continued to decline throughout the District. The factory sector was mixed, whereas the tourism and hospitality sector improved. Financial institutions noted continued strength in consumer lending. Labor markets were little changed, with few firms hiring on a permanent basis. Price increases were largely limited to health care, insurance, and some building and packaging products.
Consumer Spending
According to most District mall retail contacts, May sales were flat compared with a year ago. Although sales were mildly disappointing, most merchants said that inventories were balanced. Discounting has remained prevalent. Home-related product sales continued strong, while other product categories were mixed. Second- and third-quarter sales levels are expected to be flat compared with a year ago. District car dealers reported mixed sales performance. Generous market incentives, which some import manufacturers began to match, helped traffic and sales. However, some dealers complained that sales were lower than expected and that the recent promotions have attracted many potential buyers who did not meet credit requirements.
Real Estate and Construction
District single-family housing markets remained healthy in May. Most contacts said that home sales increased from a year ago, but construction and sales growth weakened somewhat from April to May in several areas. Florida markets continued their strong performance. Realtors described inventories of existing homes as high in Atlanta, Nashville, Knoxville, and Mobile, while inventories were low in Jacksonville, Miami, and Ft. Lauderdale. Most Realtors and builders said that new home inventories were balanced.
Sublease space continued to be a drag on commercial real estate markets throughout the District. Price concessions were present and construction continued to contract. Absorption remained weak; however, several reports indicated that some District markets have begun to stabilize.
Manufacturing
Reports from the manufacturing sector were mixed. The District's apparel industry continued to announce plant closings in May. A producer of industrial equipment reported slower activity, whereas a contact at a paper mill reported increased activity. Shipyards in Louisiana and Mississippi announced billion-dollar U.S. Navy contracts. Steel producers began replenishing inventories; however, some contacts were concerned that the tariff on foreign steel would reduce demand. Telecommunications spending was at a standstill. One source expects IT spending to accelerate in the second half of the year as firms replace equipment that has not been upgraded since Y2K initiatives. The auto industry is proceeding with investments to enhance inventory control and logistics.
Tourism and Business Travel
The District's hospitality and tourism sector continued to improve. Theme parks in central Florida were packed over spring break, and many embarked on recruitment programs to hire thousands of new employees. However, tourism officials noted concern about ongoing weakness in the number of overseas visitors. Airline passenger volumes continued to improve at Miami International Airport, and bookings for the Memorial Day weekend were strong in Miami Beach. However, room rates in Miami remain down from a year ago. Cruise lines continued to operate at full capacity with passenger counts above those of a year ago and strong forward bookings.
Financial
Consumer lending was strong across the District and problem assets remained under control, but some contacts noted increases in consumer and business loan delinquencies. Bankers were being very selective in approving new commercial lines of credit. Some contacts expected further losses in the venture capital industry, and there was virtually no merger activity in the small company arena. One report noted that a company that wanted to increase IT spending could not find financing because of conservative lending practices.
Prices and Labor
Most reports indicated that firms were not hiring permanent employees and were using temporary workers to meet any necessary increases in employment. As a result, growth in temporary services was strong throughout the District in May, albeit from relatively low levels. Some firms boosted overtime to avoid hiring new full-time employees. Health care workers remained in short supply.
Pricing pressures were largely benign except for increases in health care costs, insurance, and some building and packaging products. Concrete prices were up by double-digits since the beginning of the year, and paperboard prices have increased. Insurance rates continued to escalate.
Agriculture
Weather conditions were generally fair for major crops, but a few areas reported unfavorable soil conditions. Extreme temperature variations in Georgia contributed to the spread of a fungal disease that affects the state's sweet Vidalia onion crop. Losses for growers in southeastern Georgia could mount to $50 million for what was being called the worst crop ever. In Tennessee, recent abnormally cool weather and flooding hurt the cotton crop. Elsewhere in the region, cotton growers concerned about low prices planted smaller acreage.
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Richmond