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Economic activity has been sending increasingly mixed signals since our last report. The banking sector improved moderately, led by gains in commercial and industrial lending. Tourism also strengthened, with holiday bookings expected to be above year-ago levels. Reports on District labor markets were generally positive; however, employment agents noted that some manufacturing clients were cautious about hiring. Residential and commercial real estate agents generally described activity as mixed. Moreover, manufacturing lost momentum, with several contacts noting that demand had leveled off in recent weeks. In addition, revenue growth among non-retail service firms weakened, and retailers said that sales fell over the last month as shopper traffic dropped sharply. Manufacturing firms reported that input prices grew at a faster pace since our last report, but pass-through was limited and price growth at services firms remained moderate.
Manufacturing
District manufacturing cooled in May after expanding for seven months. Several textile and apparel contacts described their business as being unpredictable, with "very little depth." Similarly, a producer of coated steels mentioned that, although the first quarter had been fairly strong, order volume had been going down since then. Also, a supplier of specialty materials reported that his business had leveled off in recent weeks because demand for his customers' goods had slowed. Several contacts stated that the disruptions in Japan had affected automotive deliveries, due to lack of electronic components and paints. Firms reported that their customers were strongly resisting any price increases, despite knowing that commodity prices were rising. Our latest manufacturing survey revealed that prices of raw materials rose notably over the last month, but prices of finished goods were up only moderately.
Retail
Retail sales generally slowed since our last report. Several firms attributed the slowdown to higher gasoline prices. A central Virginia retailer noted that, even though consumer confidence was good in the area, buying behavior was "tentative, as customers' needs were superseding their wants," driving stores to compete aggressively on price. Apparel and general merchandise retailers reported soft sales, and a large bookseller in central North Carolina stated that sales had weakened over the last month. In contrast, a store manager at a big box discount store in Virginia Beach said sales had improved in the last month and that the store was hiring again. Most auto dealers that we contacted cited flat-to-stronger sales, despite scattered reports of inventory or parts shortages caused by the Japanese crisis. Grocery sales remained solid, and several contacts reported passing through price increases to their customers. A number of surveyed wholesalers reported faster revenue growth in recent weeks. Durable goods wholesalers generally noted a pick-up in revenues despite the reported ongoing slump in retailers' big-ticket sales. Retail prices edged up, and wages were little changed.
Services
Contacts at non-retail services firms reported somewhat slower revenue growth in recent weeks. Executives at several healthcare facilities noted flat demand for services over the last month. One hospital administrator also expressed uncertainty about the financial effect on his hospital of the increase in "newly insured" populations under healthcare reform. He noted significant challenges for smaller, rural hospitals with respect to information technology investments needed to secure federal matching opportunities. In contrast, professional, scientific, and technical firms that we survey reported slightly quicker revenue growth. Price growth at services firms was mild, while wage increases were widespread. A healthcare system executive in central Virginia reported that salary pressures were being driven by shortages in some specialties.
Finance
Lending activity posted modest but broad-based gains across the District over the last few months. Commercial and industrial lending expanded, especially for capital equipment and storage facilities. Several community bankers also cited increasing loan demand from small businesses. These borrowers had new orders from large manufacturers, who were subcontracting to keep up with demand. Consumers were starting to use credit cards again, according to several lenders, and were increasingly seeking financing for autos and home improvements. However, a contact at a large bank in North Carolina reported making very few home equity loans, and most bankers reported seeing little new mortgage lending activity. Most lenders cited improvement in their balance sheet quality, with delinquencies and charge-offs down markedly.
Real Estate
Residential real estate agents in the Fifth District gave varied reports. An agent in the D.C. area described the housing market as "terrific," noting that April produced the highest number of sales since June 2005, with the exception of last March and April, when sales were boosted by the first-time buyer program. In Richmond, however, a contact mentioned that unit sales had dropped quite a bit, along with foot traffic. Sales in the lower-price range were reported as faring much better than sales in the upper ranges. A Realtor in Richmond said that sales of homes in the $400,000 to $1 million price range had increased compared to a year ago. He pointed out, however, that sales were contingent on the houses being in perfect condition, with extremely competitive pricing. While most contacts reported that they had not seen any change in the proportion of distressed sales, one agent noticed an increase of short sales and stated that the entire short sale process remained a major issue for buyers. On balance, most contacts said that transaction prices had either flattened or continued to decline.
Commercial real estate activity was mixed across market segments and geographic areas of the District over the last month. Pockets of modest strength were noted in demand for retail space in the Hampton Roads area, as gains in retail sales in recent months bolstered retailers' confidence, according to a local Realtor. A West Virginia Realtor reported that the leasing of office space had picked up, but both retail and industrial demand remained stagnant. However, the demand for office space in Baltimore was described as "spotty at best" by one Realtor. A central Virginia Realtor noted improved commercial leasing activity and modest gains in demand for the retail space, but leasing of industrial space was unchanged over the last month. A North Carolina Realtor reported modest, but widespread improvements in leasing, while several contacts in the D.C. area cited mostly softer leasing activity over the last few weeks. Contacts generally characterized rents as having stabilized, and several Realtors stated that banks were more willing to lend than earlier in the year. A Maryland contact in commercial construction stated that area contractors were unable to increase prices due to weak demand, but subcontractors were having more success at passing though increases in commodity costs.
Labor Markets
Labor conditions were flat to slightly stronger since our last report. Several employment agents were upbeat, but noted localized areas of softness in demand across the District. Some employment agents indicated that they were placing more permanent workers than they were a year ago. However, a branch manager of one agency in Raleigh said that some manufacturing clients remained cautious about hiring decisions due to the instability of incoming orders. A Hagerstown agent said, "Growth is not surging forward quite as much as a few months ago, but we are still seeing growth in demand compared to a year ago." He noted, however, that gains were somewhat uneven because the demand for extra workers seemed to come and go within short time frames, indicating volatility in his clients' own sales and production. Retailers made few hiring changes in recent weeks, following an extended period of payroll cuts, according to recent survey participants. However, the store manager at a chain discounter in North Carolina remarked that a local manufacturer had begun recalling laid-off workers, which included some store employees; because the manufacturing wages were more attractive than what he could offer well-qualified applicants, he will cover the vacancies with more hours for seasonal workers. Services providers continued to add employees, although the overall pace of hiring in the sector slowed from a month ago.
Tourism
Tourism in the District continued to show signs of improvement in recent weeks. Airport contacts in Maryland and Virginia reported strong business travel since our last report. In addition, recreational industries, restaurants, and hotels noted stronger revenue growth, according to our contacts. A contact on the North Carolina coastline told us that tourist activity had increased compared to year-ago levels, and house rentals were up as much as 20 percent or higher in the last few weeks. A tourism contact in Washington, D.C. reported that the number of incoming tour buses was unusually high, and the nation's capital expected more than 500,000 tourists on Memorial Day weekend.
Agriculture
Rain and below-average temperatures hindered cotton planting in South Carolina and delayed corn and soybean planting in parts of Virginia and West Virginia. In contrast, cotton planting was almost complete in Virginia and planting of peanuts was progressing on schedule. In Maryland and Virginia, vegetable growers continued to plant summer crops and harvesting of greens and strawberries was well underway. Moreover, an analyst in Maryland noted that a large amount of good quality hay had been cut and baled, due to good drying conditions. In addition, pastures continued to green-up. Lastly, peach conditions in South Carolina and West Virginia ranged from fair to excellent, with most orchards in good condition.
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Cleveland