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The Fifth District economy advanced at a quicker pace in January and most of February, driven by strong retail sales and robust manufacturing activity. Retailers reported markedly higher sales including sales of big-ticket items. Manufacturing activity accelerated in recent weeks; capacity utilization and new orders advanced at the strongest rates seen in several years. Contacts at services firms noted moderately increased revenues and employment during the period. Real estate activity expanded at a moderate rate despite higher mortgage interest rates. Lending activity, in general, remained strong. In labor markets, wage pressures picked up somewhat in manufacturing and in retail, but eased in the services sector. Prices rose only modestly in most sectors of the District's economy.
Retail
District retailers reported much stronger sales growth in the weeks since our last report. Although winter storms slowed customer traffic at some stores in late January, shoppers opened their wallets in February. Customers suffering from cabin fever after several days at home bought ravenously, according to a New Bern, N.C., contact. Big-ticket sales growth was strong throughout February, especially for automobiles and home furnishings. While inventories increased slightly since the last report, a number of retailers reported that deep price discounts on Presidents' Day helped move out winter merchandise and clear space for new spring lines. Retailers trimmed workforces in February, but modest upward wage pressures persisted. Retail prices rose only modestly in recent weeks.
Services
Revenues at District services firms grew at a moderate rate in the last two months. Contacts at electric and gas utilities reported their revenues were boosted by soaring demand during the late January cold snap. Revenues at business services and computer consulting firms rose moderately as their customers reinitiated projects that had been put on hold while Y2K problems were addressed. A computer networking contact in Charlotte, N.C., noted a pickup of new business within the last month. Services providers added employees at a faster rate, while wage and price pressures remained subdued.
Manufacturing
District manufacturing activity strengthened considerably in recent weeks. Manufacturers recorded solid growth in new orders and a sharp increase in capacity utilization in January, and they noted a pickup in growth in February. Contacts in the chemicals, food, electronics, paper products, and fabricated metals industries reported exceptional strength in shipments in the last several weeks. On the employment front, the level of manufacturing employment was little changed since our last report, but manufacturing wages and the average workweek rose. Raw materials prices also moved higher as the effects of higher crude oil prices were more broadly felt by District producers. Tire and rubber manufacturers, in particular, noted that they now expect hikes in raw materials prices to outstrip gains in prices received during the next six months.
Finance
District loan officers reported that the level of lending activity changed little in January and February. Commercial lenders told us that generally strong loan demand persisted despite higher interest rates. A commercial banker in Norfolk, Va., said that higher interest rates had actually increased loan demand in the short run because borrowers wanted to lock in rates now rather than risk future rate increases. In addition, a commercial lender in Greenville, S.C., said that he was negotiating more fixed-rate loans because of borrowers' concerns that interest rates will rise further. Residential mortgage lenders reported little change in loan demand.
Real Estate
Residential real estate activity advanced at a moderate pace in January and February. Realtors described the District of Columbia market as strong, and they said that Northern Virginia was the hottest submarket in that region. In contrast, home sales were reported to be weaker in southern Maryland, and mixed in the Baltimore area. A Frederick, Md., contact indicated that home prices rose substantially there in recent months, and he expressed concern that lower income buyers were being shut out of the market. Contacts in Richmond, Va., reported a dip in home sales, but realtors in Virginia Beach said sales there remained strong. Construction and home sales advanced at a normal pace for this time of year in North Carolina, aided in part by continued rebuilding in areas affected by last year's flooding. In upstate South Carolina, however, contractors were reportedly turning away work because of a lack of skilled labor. Across the District there continued to be scattered reports of rising labor and materials costs
In commercial real estate, construction advanced at a seasonal pace and lease rates showed some signs of upward pressure in recent weeks. Realtors in the District of Columbia said that the market for Class A office space was tightening and that lease rates were rising. In that market, about a half-million square feet of speculative office space was under construction in Montgomery County, Md. In addition, a substantial amount of construction was underway in Northern Virginia, primarily for information technology companies. Retail and office vacancy rates in Richmond, Va., were described as starting to decline, while lease rates remained firm. In Charlotte, N.C., commercial construction was reported to be about average for this time of year, and buildings under construction were about 50 percent pre-leased. South Carolina realtors noted a slight tightening in the office market in Columbia, and said that lease rates inched up a little recently.
Tourism
District tourist activity continued to be mixed. Snow and ice storms in late January caused a large number of cancellations and early departures at coastal resorts. February snowfall, however, increased the snow base and business at area ski resorts. A manager at a ski resort in Virginia reported that his business doubled whenever there was as much as four inches of snow in the area. A West Virginia counterpart also reported good business, noting that bookings at his resort were up 35 percent compared to a year ago. Looking ahead, tourism industry contacts expressed concern that rising gasoline prices could reduce their business through the spring and summer.
Temporary Employment
Demand for temporary workers rose in the weeks since our last report. Although some District retailers trimmed their payrolls in January, many increased their workforces to help with the transition to new spring lines. Administrative workers with computer skills still topped the most-wanted list at many firms; technical programmers ranked a close second. Despite widespread skilled worker shortages, wage increases were said to have moderated over the past six weeks.
Agriculture
Mild weather in early January allowed District farmers to make good progress working fields. Winter storms later in the month, however, brought heavy snow, sleet, and freezing rain to the region. The precipitation from the storms helped replenish soil moisture and groundwater, and the snow helped to insulate small grains from freeze damage. But District pastures were covered with snow for extended periods of time, making supplemental feeding of livestock necessary in some areas. These supplemental feedings resulted in a shortage of hay in West Virginia and Maryland and forced some producers to substitute more costly alternative feeds.
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Cleveland