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Fifth District economic activity continued to grow at a moderate pace in the weeks since our last report. Retail sector growth slowed noticeably from its rapid rate earlier in the year, pulled lower in part by softer consumer-durables sales. In contrast, growth in the manufacturing sector edged up because of solid domestic demand, and the service sector expanded at a more rapid clip. Real estate activity and bank lending remained strong throughout most of the District. Labor markets stayed very tight and employers continued to scramble for qualified workers, but wage growth remained generally modest. Prices of goods and services were little changed. In agriculture, hot and dry weather stressed crops and reduced yield prospects.
Retail
Retail sales grew more slowly, and firms lowered their staffing levels in recent weeks. Among merchandise categories consumer electronics and hardware and lumber sales were softer. While some retailers trimmed employee numbers to reduce labor costs, tight labor markets left other employers unable to fully staff their stores. The manager of a hardware store in Columbia, S.C., expressed frustration at high employee turnover and has recently purchased material-handling equipment to reduce his labor needs. In contrast, automobile sales were strong in June and July, although some General Motors (GM) dealers reported low inventories because of the United Auto Workers (UAW) strike. Wage growth in the retail sector moderated somewhat, and of those contacts who reported wage increases, several said that the higher wages were straining their profit margins.
Services
Service sector revenues grew at a slightly quicker pace since our last report. Hotels reported a sharp uptick in both business and vacation stays. The Richmond, Va., airport indicated that air passenger traffic set a record in June. Employment rose in recent weeks, but the gains were more modest than in our last report. Wage growth eased a bit, while prices for most services were generally little changed; higher hotel prices were a notable exception. Looking forward, service providers anticipate increased demand for their services through the end of the year.
Manufacturing
District manufacturing activity strengthened somewhat in recent weeks following a sluggish June. Shipments and new orders growth bounced back for most goods-producing industries. However, employment slipped lower, particularly at textile and apparel plants. Several textile mills recently announced job cuts because of continued economic problems in Asia. A contact at one North Carolina textile mill said that these problems were "getting worse quickly." In contrast, shipments of industrial machinery and electronic equipment grew more quickly.
The UAW strike against GM is having an impact in the Fifth District. Nearly 2,700 workers at a GM plant and 300 at a GM parts supplier in Baltimore, Md., have been laid off. In North Carolina, a producer of fabrics used in GM automobiles said that his company had asked its employees to take vacations on a rotating schedule in order to avoid layoffs. In South Carolina, some auto parts producers have begun altering their work schedules and eliminating overtime until a settlement is reached.
Finance
District loan officers reported strong and steady demand for bank loans. Continued low interest rates and a strong economy have underpinned brisk mortgage lending. Commercial lending was boosted in some areas by increased construction loans. Vigorous competition for commercial accounts persists; in the words of a Charleston, S.C., banker there is simply "too much money chasing too few deals." A few bankers we talked with said that more intense competition was resulting in "looser" loan covenants in the industry.
Real Estate
Residential realtors described home sales as "very strong" to "excellent" across most of the District. Less expensive homes sold particularly well, in part because low interest rates continued to make houses more affordable to first-time buyers. In some areas, however, contacts said that the supply of new homes rose; a West Virginia realtor noted that speculative building had caused the normal six-month supply of homes to balloon to a ten-month supply. Homebuilders reported that building permits and housing starts were "holding steady" at generally high levels. Labor and materials costs rose only modestly, despite widespread shortages of skilled workers. House framers were in extremely short supply and one builder said that framers could "name their price."
Commercial real estate activity remained at a high level, although some contacts noted evidence of a slowdown. A North Carolina realtor described the market as "static compared to before" with "no major swings one way or another." In contrast, a South Carolina contact said that the market there was just "humming along," and a District of Columbia contact characterized growth in that market as "brisk," driven by the need for more office space for law firms and telecommunications companies. Realtors' outlooks for commercial real estate activity were mixed, but most expected no change in market conditions in coming months.
Tourism
Tourist activity continued to strengthen in June and the first three weeks of July. Bookings for the Fourth of July holiday were somewhat stronger than those a year ago; one resort operator on North Carolina's Outer Banks credited unusually pleasant weather for increased business during the holiday. Looking forward, contacts at hotels and resorts expected tourist activity to remain strong through the end of the year.
Labor Markets
Strong demand for workers persisted throughout the District in almost all industries. Contacts at employment agencies said that employers were seeking help in many job categories, but particularly for administrative assistants with computer knowledge. Employers continued to comment on the disappointing quality of job applicants; a printer in North Carolina said that the quality and productivity of new hires had declined in recent months and that "many work a week or two and then fail to return." A Columbia, S.C., lumber retailer echoed the view of many employers with his comment that the low quality of available workers is "what you would expect with a two percent unemployment rate." Despite labor market tightness, wage pressures remained mild; several contacts expressed the general sentiment that competitive pressures severely limited the wage increases they could offer.
Agriculture
Agricultural analysts report that despite some scattered showers in recent days, unusually hot, dry conditions across most of the District had stressed crops, especially corn which is in its pollinating and ear-filling stages. In South Carolina, the heat and drought has hit crops particularly hard; some fields there were considered a total loss. In other areas, producers of high-value crops such as tobacco and vegetables turned to irrigation to maintain their yields. Across the District, yield prospects for many crops have diminished in the last few weeks and agricultural analysts said that continued heat and drought could quickly broaden crop losses.
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Cleveland