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Economic activity in the Fifth District slowed since our last report. Manufacturing activity pulled back markedly in August, following a sluggish July, and retail sales weakened. Residential construction and housing sales declined further, while commercial real estate activity was mixed. Banking activity was also mixed, with some commercial lenders citing some improvement but mortgage bankers reporting continued weakness. In contrast, activity at non-retail services firms edged up. After earlier improvements, coastal hoteliers watched their guests flee as Hurricane Irene approached. However, inland hotel managers reported no change in their solid bookings. Labor markets were mixed; while temp services reported some improvement, employment remained nearly flat at manufacturing establishments. Price pressures in the District edged higher over the last month. Manufacturing prices paid and received accelerated, while prices in the service sector picked up slightly. Finally, recent precipitation improved agricultural conditions in most parts of the District, although Hurricane Irene damaged coastal crops.
Manufacturing
District manufacturing activity contracted in August after stalling in July. A producer of modular homes stated that "business is terrible," citing this as the worst year in his 40 years in the business. Several textile manufacturers mentioned that markets for their products had grown considerably weaker since our last report, which they attributed in part to declining confidence among customers. Similarly, a producer of packaging film mentioned that his firm had cut production over the last three months. Moreover, a manufacturer of bottled and canned soft drinks noted sales were down sharply from last year, producing lower-than-normal sales for this time of year. Low-end cabinet makers reported that their firms continued to struggle with below-average profits. In contrast, high-end cabinet manufacturers affirmed that sales continued to improve, albeit at a slower rate than in the spring. The District manufacturing survey for August revealed that prices for both raw materials and finished goods grew at a somewhat quicker pace than a month ago.
Retail
Retail sales mostly weakened in late July through August. A wide range of retailers indicated that sales had declined in recent weeks as shoppers searched for bargains, while polled store managers at general merchandise stores mostly reported little change in revenues. A manager of a chain of hardware stores noted a decline in sales in recent months. Also, a contact told us that a Baltimore jeweler had little business over the last month other than engagement rings. A grocery executive reported higher revenues, while also indicating that his input prices had risen, putting pressure on margins. The pace of retail price increases stepped up from a month ago, according to our most recent survey.
Services
Non-retail services firms saw an uptick in revenues in recent weeks, according to most contacts. Stronger consumer demand for services was reported in telecommunications and healthcare, and a food distributor in the Baltimore area noted increased demand from locally owned restaurants and delicatessens. A financial data services firm reported improving demand from restaurants and retailers in Maryland and Virginia, although other business services providers noted negative ripple effects from a slower economy. In contrast, an executive at a Virginia linen service stated that low bookings at hotels had reduced demand. Contacts at senior care facilities in Maryland and North Carolina remarked that expected new residents had postponed their move-in date while their homes remained on the market. Service sector prices grew at a slightly faster pace, according to our latest monthly survey.
Finance
Lending activity was mixed since our last assessment. A banker in North Carolina stated that loan volume was "pretty good" in recent months, but added that most of the activity was market share gains rather than a piece of a growing market. Indeed, several bankers noted an increase in calls from businesses that were looking for new banking relationships, but few were ready to make a loan application. An official at a large bank in the District noted some improvement in loans for capital spending, but added that most was limited to replacing worn out capital. A commercial banker in Richmond cited recent cutbacks in loan demand from several manufacturers. A banker in rural Virginia described his loan demand as "extremely flat," with modest gains on the commercial side offset by weak demand on the consumer side. Several bankers noted weaker-than-expected mortgage demand over the last month. Most contacts stated that loan quality continued to improve, but several bankers indicated that they eased lending terms in order to compete for quality borrowers.
Real Estate
Real estate activity weakened over the last four to six weeks. Several Realtors reported that sales had dropped considerably in recent months and that their markets were less active than a year ago. A Realtor in eastern Maryland indicated that home sales as well as average home prices were down notably from earlier in the year. A West Virginia Realtor said potential buyers were calling and looking for bargains, but that there were few actual sales. He mentioned that some sellers were starting to reduce prices significantly. Similarly, an agent in central Virginia noted that asking prices continued to fall. Most Realtors said that the high-end market was suffering, which they attributed to devalued portfolios of the wealthy, as well as uncertainty about employment and job stability. In contrast, a Realtor in the D.C. area reported that properties in the $900 thousand to $1.5 million price range moved quickly over the last month. He added that low interest rates and lean inventory, which reached its lowest level since February 2006, should help improve area sales in the fall.
Commercial real estate activity since our last report was mixed across most segments of the market. Virtually all contacts described market conditions as remaining weak, in terms of both leasing volumes and rental rates. While a Realtor in South Carolina reported that activity had picked up over the last few months, gains were mostly due to consolidations and renewals that often occurred at reduced lease rates. A Realtor in North Carolina noted that leasing incentives were still being offered aggressively in local markets. An agent in the D.C. area said that renewals often required owners to offer significant improvement packages. In contrast, a real estate agent in West Virginia remarked that further softening of lease rates was constrained by the limited amount of vacant space in the area. Most retail leasing activity in the District was limited to national chains, according to several contacts, in part because financing remained an obstacle for small retailers. Contacts generally noted that greater uncertainty about the market and the economy had pushed clients to prefer leasing over buying. One contact stated that sales to leases had recently fallen from a typical one-to-four ratio to one-to-fifteen.
Labor Markets
Reports on Fifth District labor market activity were mixed in August. Several employment agencies reported somewhat stronger demand for temporary help in recent weeks, particularly in the healthcare and automotive industries. The branch manager of a temp agency in North Carolina stated that manufacturers had openings for skilled positions, but they had difficulty finding machine operators with at least one year of experience. Likewise, a contact from South Carolina reported that three large manufacturers in the area were trying to hire, but could not find qualified candidates. In contrast, an executive from the D.C. area said that a major corporation had initiated a hiring and advertising freeze. Also, a banker indicated that some of his clients said that they would rather pay workers overtime than hire new workers, due in large part to the recent environment of heightened uncertainty. According to our latest survey, job losses in the service sector were somewhat more widespread than in our last report; wages in the retail sector weakened on average, while average wage growth slowed at services firms. Survey respondents from most manufacturing industries indicated that hiring inched up over the last month, while the average workweek declined and wage growth slowed.
Tourism
Tourism generally strengthened over the last month, although contacts along the Atlantic coast lost significant end-of-summer business as Hurricane Irene came ashore one week before Labor Day weekend. Local evacuation orders in areas along the coast of North Carolina resulted in cancellations and shortened stays for the end of August. In addition, an hotelier in Virginia Beach reported several cancellations and early check-outs, as guests left the area ahead of the storm. Inland, however, hotel managers reported solid bookings, and several were experiencing a rush of hurricane evacuees. In the weeks prior to the hurricane, bookings had been strong, although some beach resorts used incentives to bolster reservations. According to a local contact, hotels in the D.C. area discounted room rates to boost reservations over the summer, which increased volume but held down margins.
Agriculture
Scattered precipitation over the last two months promoted crop growth in many sections of the District, but more recently crops along the coast were damaged by Hurricane Irene. Rain in early August aided late summer peaches in West Virginia and soybean harvests in Virginia. Virginia growers were also busy cutting hay and preparing for the corn harvest and the flue-tobacco harvest was in full swing. Ninety-six percent of the corn crop in South Carolina had matured and was forty percent harvested up to the hurricane. However, post-hurricane inspections by state officials in North Carolina revealed widespread damage to field crops, poultry and other agricultural businesses. Moreover, agricultural agents in that state reported damage to greenhouses, grain storage facilities and aquaculture operations. Fortunately, cotton bolls had not been stripped from their plants by high winds, and tobacco farmers may have been saved by rushing their crops to curing barns before the storm stuck, according to the agricultural agents.
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Cleveland