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Overview
Fifth District economic growth slipped a notch in recent weeks from the brisk pace described in our last report. Retailers said that sales growth was sluggish during much of August, but picked up noticeably late in the month and in early September. Services providers reported moderately lower sales throughout the period. In contrast, District manufacturers recorded higher shipments and new orders, although the rates of increase were not as robust as those reported in July. At financial institutions, commercial and consumer lending remained strong, but mortgage lending tapered off as interest rates on mortgages rose. Real estate activity remained solid, but some signs of slowing growth emerged, particularly in Virginia and West Virginia. Wages accelerated in manufacturing and services, and advanced at a slower pace in retail. Prices of goods and services changed little. In agriculture, Hurricane Dennis brought much needed rain to the area, but drought conditions remain in the southern portion of the District.
Retail
Retail revenue growth slowed in the first three weeks of August as sales of big-ticket items, particularly automobiles, weakened. A Norfolk, Va., automobile dealer said that exceptionally hot weather was partly to blame, remarking, "When it's this hot it's hard to get people on the lot." Shopper traffic in stores throughout the District slowed considerably and inventories expanded. In late August and early September, however, shoppers stocked up on back-to-school apparel and supplies, boosting sales above last year's levels for the period. Retailers reported little change in employment since our last report; wage growth slowed and retail prices rose only modestly. Looking forward, retailers trimmed their optimism regarding sales in coming months.
Services
Revenues at service firms fell since our last report; demand for business and real estate related services was particularly sluggish. Although most services providers left staffing levels unchanged in August, more employers raised wages to retain workers. A contact at an automotive repair shop in Raleigh, N.C., for example, noted, "If I don't pay up, my workers are going to leave: it's as simple as that." Prices of services edged higher and most contacts looked for only modest price increases in coming months.
Manufacturing
District manufacturing activity grew at a more moderate rate since our last report, with some pockets of weakness still evident. Shipments and new orders both expanded in August, but at slower rates than in July. Manufacturers of food, tobacco, and industrial machinery products recorded particularly strong increases in shipments. An industrial machinery producer in North Carolina said that manufacturing activity had "picked up" at his plant and reported that he was starting to see substantial price increases from some vendors. On the other hand, textile mills continued to report overcapacity and plant closings. In addition, some manufacturers were expecting housing markets to slow; a North Carolina furniture maker, for example, said that because of the anticipated slowdown, his company recently lowered its estimates for next year's sales and profits. Manufacturing employment and the average workweek grew at a slower pace, but wages accelerated. Prices for manufactured goods moved slightly higher.
Finance
District bankers reported that commercial and consumer loan demand remained strong in August, but demand for home mortgages slowed considerably. An expanding regional economy continued to drive commercial lending growth and prospects for future commercial loans remained bright; several lenders noted that they had "good deals in the pipeline." Consumer lending growth was little changed despite higher interest rates. In the words of a Rocky Mount, N.C., banker, "Rates on consumer loans have gone up but customers are willing to pay." Borrowers appeared to be less sanguine, however, about rising home mortgage rates. Higher mortgage rates and, in some cases, higher home prices, slowed mortgage lending in August. A Charlottesville, Va., banker described mortgage lending there as "dead in the water" because fewer borrowers could afford homes at prevailing interest rates and home prices.
Real Estate
Residential real estate markets have been mixed in recent weeks: while several "hot" markets persisted in the District, others showed signs of wilting. A realtor in Washington, D.C., reported "tremendous activity" driven, in part, by renovation of older neighborhoods. Realtors said that it continued to be a sellers' market in Richmond, Va., with homeowners routinely receiving offers above asking prices in choice neighborhoods. In Roanoke, Va., and Virginia Beach, however, sales dipped in August. Realtors in West Virginia reported lower sales prices and volume declines beyond the normal seasonal slowing. While homebuilders throughout the District generally indicated little change in the number of building permits issued in recent weeks, there were fewer complaints regarding shortages of labor and materials, possibly suggesting some easing in the pace of residential real estate activity.
Realtors also reported some easing in commercial real estate markets in Virginia and West Virginia, and no major changes in markets in Washington, D.C., and Maryland. In Richmond, Va., however, the market for Class A office space was tighter, especially in suburban areas. In North Carolina, realtors said there was a slight slowing of growth in leasing activity. In Charlotte, new construction activity returned to a more normal rate after a burst of activity in the first half of this year. South Carolina realtors, in general, noted only a slight increase in leasing and a little absorption of vacancies. In contrast, a Columbia, S.C., realtor said that real estate markets in that area were more upbeat; in his words, "humming along."
Tourism
District tourist activity generally strengthened in August, but was weaker in coastal areas in September as Hurricane Dennis brought high winds and heavy rain to the region. Bookings for the Labor Day weekend were sharply lower in resort areas bearing the brunt of the storm, including Virginia Beach and the Outer Banks of North Carolina. Extensive property damage and beach erosion were reported in both areas. However, tourism in the District's northern coastal towns, such as Ocean City, Md., was little affected by the storm; a contact at a boardwalk business in Ocean City reported a record turnout for the holiday weekend. Looking ahead six months, most District contacts expected tourist activity to remain good.
Temporary Employment
Demand for temporary employment remained brisk across the Fifth District in recent weeks. Manufacturing and technology firms appeared to have the biggest appetites for temporary workers while hiring requests from retail firms were sluggish. A contact in Columbia, S.C., said the hiring scene was similar to last year except now manufacturing companies are "back in the game." Finding quality workers is still the biggest challenge for employment agencies, especially since many firms have been reluctant to increase wages substantially. Wage increases are expected to continue to be modest over the next six months. Employment agents reported that District firms plan to add workers this fall, but at a slightly slower pace than last year.
Agriculture
Cooler temperatures and rains from Hurricane Dennis in early September brought relief to parched Fifth District farmland in some areas. Soil moisture levels are now much closer to normal in many areas of North Carolina and Virginia, although more rain is needed to replenish soil moisture and ground water in Maryland, South Carolina, and West Virginia. The rain boosted Virginia's hay crop and may enable more of the crop to be stockpiled for feed this winter, lessening an anticipated shortfall. In contrast, the rains came too late to improve low corn yields, but did raise yields on some late-planted soybeans. In South Carolina, livestock operators continued to feed their animals hay where pastures are dormant, and in West Virginia, farmers hauled water for livestock in areas where wells have dried up.
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Cleveland