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The Fifth District economy expanded at a more modest pace in recent weeks. Growth slowed in the manufacturing, service, and residential real estate sectors, while adverse conditions from Hurricane Fran damped tourist and farming activity. In addition, state revenues grew more slowly. Lending and port activity changed little, while retail sales
grew faster and commercial real estate continued to gain momentum. Contacts in several sectors reported persistent labor market shortages and higher raw materials prices.
Retail Trade
Retail sales grew faster in September, although most other indicators of retail activity were steady or slowed. District retailers reported that big ticket sales and shopper traffic grew at the same pace as in September. However, wage and employment
growth declined and some retailers expected negative impacts from recent minimum wage legislation. A North Carolina retailer said the minimum wage increase "will force layoffs," and a Maryland retailer noted that it "will raise our costs and prices." Contacts reported slower growth in inventory levels. Respondents indicated that retail prices rose more quickly in the last several weeks, but they expected their prices and demand for their products to rise more slowly during the next six months than they had in August.
Services
District service producers indicated that business activity increased more modestly in September. Revenues, wages, and employment all grew more slowly in recent weeks than they had in August. A Wilmington, N.C., real estate broker attributed slower September activity to the effects of Hurricane Fran, but noted that "the phone is slowly starting to ring again." On a positive note, a Raleigh hotelier remarked that the storm brought in "insurance adjusters, repair workers, and emergency-agency workers," and that "all hotels are filled." Service prices rose at a faster pace in September, but respondents expected prices and demand for their products to increase more slowly over the next six months.
Manufacturing
Manufacturing activity grew more slowly in September. Most paper product suppliers, printing firms, and durable-goods producers indicated that new orders had weakened in September. Some textile manufacturers reported that slack apparel demand, coupled with excess capacity, pushed their prices lower. However, complaints of labor
shortages remained widespread, particularly for industrial machinery and equipment producers.
Manufacturers indicated that finished goods prices and raw materials prices grew at faster rates in September than in August. Respondents' six-month outlook was for higher finished goods and raw materials prices.
Tourism
Tourist activity continued to weaken at coastal areas in September in the wake of Hurricane Fran, but showed strength elsewhere. A hotel manager in the Myrtle Beach area said storm-related vacancies reduced his revenues by $45,000; a contact from the Outer Banks' chamber of commerce noted that after the soft September, October activity was looking better. A respondent from a popular mountain resort said the September tourist activity was the best in the resort's history and continued to show strength during the first two weeks of October. Contacts reported that fall bookings were about the same when compared to a year ago.
Port Activity
Representatives at District ports indicated that import levels were lower in September than in August and that export levels were higher. Most port contacts continued
to expect higher levels of imports and exports during the next six months, with export activity outpacing imports.
Temporary Employment
Fifth District temporary employment agencies reported increased demand for contingent workers during September and early October. Contacts from areas with low unemployment rates said that wages increased and they expected worker shortages and upward wage pressures to continue during the next six months. One contact
remarked that employers in his area were reducing the time necessary for temporary employees to gain full-time status in an effort to retain the workers.
Finance
Lending activity in the District showed little change during September and early October. Lenders reported that mortgage interest rates fell slightly, but the demand for home loans was steady. District banks continued to price commercial loans aggressively, and banks' margins on these loans were being squeezed. One contact said that the quality of
consumer loan applications at her bank had deteriorated, leading to a marked increase in loan refusals.
Residential Real Estate
Residential real estate activity continued to decline in recent weeks. Housing starts and permits, as well as home sales and prices, decreased. Contacts reported that buyer interest had waned; one realtor noted, "it's the slowest traffic in 15 years."
Despite the slowdown in activity, wages and materials prices increased. Homebuilders indicated that sheetrock and lumber prices rose, while contacts in North Carolina reported shortages of skilled labor.
Commercial Real Estate
Commercial real estate activity strengthened in the last six weeks. Leasing activity continued to escalate; one South Carolina contact characterized the market there as "frantic." Vacancy rates fell further and rental rates climbed again across the District. The availability of prime office space continued to tighten, and many contacts
reported shortages. Respondents noted an increase in new construction, although a North Carolina broker remarked that "lenders aren't excited about speculative construction."
State Revenues
State tax collections generally increased, but at a slower pace in September than in August. Withholding tax collections rose at a slightly higher rate. Sales tax collections increased in all jurisdictions except North Carolina and Virginia. One North Carolina contact said that the shutdown of retail businesses because of Hurricane Fran lowered sales tax receipts there. Individual estimated payments and corporate income tax collections rose at a faster pace, but real estate recordation tax receipts grew more slowly.
Agriculture
The effects of Hurricane Fran were still being felt across the District. Agricultural analysts said that, in areas hardest hit by the strong winds and heavy rains, crop harvesting activity remained behind the average pace of the last five years. Excess rains associated with Fran and other severe storms delayed farmers' planting of winter small grain crops. In areas not directly affected by the storms, agricultural activities appeared to progress at a near-normal pace.
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Cleveland