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In the weeks since our last report, the Fifth District economy continued to grow moderately, despite a pullback in manufacturing. Solid growth in personal income underpinned retail growth, and activity remained healthy in the services sector. Manufacturing stagnated, however, as shipments fell and growth of new orders moderated. Residential and commercial real estate activity continued to advance, although at a slower pace. Bank lending edged higher, driven by a pickup in commercial lending activity. Employers continued to face widespread labor shortages, but wage growth showed few signs of acceleration. Overall, price growth slowed somewhat in recent weeks, although manufacturers reported a slight uptick in materials prices.
Retail
Retail sales continued to post healthy gains in recent weeks. Purchases of durable goods were particularly robust, fueled mainly by a revival in auto sales. Merchants reported that shopper traffic kept pace with that of the previous Beige Book period. Retail inventories increased, partly in expectation of continued sales growth. Most contacts were a bit more optimistic in their outlook for retail activity in coming months, and some furniture and apparel retailers had recently added staff in anticipation of stronger sales. Prices in the retail sector rose at a slightly slower rate.
Services
Service providers experienced solid growth in the weeks since our last report; one South Carolina trade show promoter described the current business environment as "so good it's scary." While revenue growth was balanced across most service industries, those specializing in repair services noted the sharpest increase. In addition, businesses related to real estate and air transportation sustained their exceptional growth rates of recent months. The pace of price growth in the service sector slowed.
Manufacturing
Fifth District manufacturers reported that shipments declined and that new order growth was more modest since our last report. In addition, more producers indicated that their capacity utilization rates had eased. Production declines were most pronounced in the chemical, electronics, paper, and plastics industries. Despite the slower pace overall, a source with North Carolina's Research Triangle Park said that biotechnology firms there were doing "extraordinarily well." Food producers also experienced more vigorous growth and tobacco producers saw activity bounce back from its slowdown in April.
Manufacturers remained concerned about the "Asian flu" impact, especially on the textile and apparel industries. While the crisis continued to hurt exports, the greatest effect remained increased competition from higher import levels. Most contacts expected these competitive pressures to rise further in coming months; however, one producer believed that textile quotas would soon be reached, restricting imports during the second half of 1998.
Finance
District banks reported somewhat higher lending activity in late April and May. Commercial lending was particularly strong. A banker in Greenville, S.C., told us that a number of companies there were pushing the limit on current plant capacity and were seeking financing to expand their production facilities. Mortgage lending remained brisk, bolstered by low and stable interest rates. According to one contact, demand for home mortgages was high because people who previously had been "sitting on the fence" were now convinced that mortgage rates were unlikely to drop further. Lending also was boosted by more intense marketing of equity-based lines of credit.
Real Estate
Residential real estate activity remained strong across the District in recent weeks, although the pace of growth leveled off. Realtors described home sales as strong in late April and May but indicated that sales and customer traffic were not quite at the levels seen earlier in the year. A Washington, D.C., realtor noted a slight slowing of business in May, but said there was "no end in sight for the good market." Some contractors reported that residential building activity edged higher while others said there was little change. Housing starts fell in the Greenville-Spartanburg, S.C., area; this decline, however, was attributed to a shortage of experienced plumbers, brick masons, and electricians rather than to softer demand. Although there were scattered reports of higher costs for both labor and materials, the increases were generally modest.
In commercial real estate, growth also showed signs of moderating. While overall activity remained at high levels, office leasing activity in some areas appeared to be backing off from the hectic pace seen earlier this year; one contact said that in Virginia and West Virginia, activity had "slowed around mid-April and continued to be slower." However, retail and restaurant space was in greater demand, particularly in Virginia. In the Carolinas, business relocations were helping to sustain commercial real estate activity. "Booming" growth was reported for outlying areas of metropolitan Charlotte, N.C., and a contact there noted that the area was receiving "ten times the number of business relocation inquiries" than they had received a few years ago.
Tourism
Tourist activity strengthened further in recent weeks. Bookings for the Memorial Day holiday were much stronger than those of a year ago; one contact in the Outer Banks of North Carolina reported that hotels there were "almost booked to capacity." Some hoteliers attributed the increase in bookings to an unusually early end of the school year coupled with higher consumer confidence and favorable weather conditions. In Charleston, S.C., the annual Spoleto Arts Festival of late May and early June had record-breaking attendance. Tourism officials in coastal areas expected that low gasoline prices and general economic strength would lead to an "incredible" summer season.
Labor Markets
Outside of manufacturing, the demand for workers remained intense since the last Beige Book. Retailers added workers to keep up with robust sales growth, and service firms continued to add employees at a high rate. Labor shortages persisted, and temporary employment agencies faced growing demand for workers, especially those with computer proficiency. In Charlotte, N.C., where the unemployment rate is 2.3 percent, one employment agent said that some firms were "talking about possibly relocating [outside the Charlotte area] to find the workers they need."
Despite these reports, overall wage pressures remained mild. In the retail and services sectors, only scattered reports of substantial wage hikes were received. However, in one case, an employer said that her workers were disappointed when they received a 6 percent pay raise, "thinking it would have been more." Contacts noted that signing bonuses were being offered more frequently, even for entry-level positions. In addition, employers in areas of low unemployment showed a greater willingness to pay the moving expenses of new hires.
Agriculture
Favorable weather conditions in recent weeks benefited District crops according to agricultural contacts. Small grains were generally in good condition and, with harvest approaching, producers anticipated excellent yields. Drier weather allowed farmers to catch up on fieldwork; one noted that the respite from the rains allowed him to "put up one of the best hay crops ever." In the Carolinas, the production of early peaches fell short of the normal level, and one producer said that prices were "as high as he's ever gotten." Livestock prices improved; one producer said that while cattle prices were "not setting the woods on fire," they had moved above producers' break-even levels.
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Cleveland