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The Fifth District economy expanded at a quicker pace in August and early September than in previous months, as activity at retail and services firms rebounded from a mid-summer lull. Retail sales growth was brisk in recent weeks, driven by back-to-school and big-ticket purchases. Services firms recorded substantially higher revenues in August and contacts were notably more upbeat about future sales growth. Manufacturing activity remained generally strong, despite some easing in the growth of new orders. Activity in real estate and banking was bolstered by lower mortgage rates in recent weeks. In labor markets, employment growth downshifted in August, but wage growth was largely unabated. Price increases were more modest in manufacturing, but little changed in the services sectors.
Retail
Stores were busier and sales grew more rapidly in August and early September than in previous months, with some respondents reporting an improvement in big-ticket sales in the last two weeks. Retailers said that back-to-school sales were better than last year and that sales of most other items were firm. Both automobile and appliance dealers noted that early September revenues were higher in part because of attractive manufacturers' incentives. Retail employment fell in August as summer employees left, while average wage growth picked up further. An apparel retailer in Charleston, W.V., said he had raised base wages in order to attract qualified part-time employees and, as a result, also had to raise wages for full-time employees. A manager at a large department store chain said that he was increasingly "struggling hard to get entry-level people" and that his store was considering raising wages to attract those employees. However, retailers indicated that higher wages have not generally affected the prices they charge.
Services
Revenues at services firms rose moderately in August, in part because of increased Internet-related revenues. A car rental agency reported very strong summer business and noted a significant increase in rentals booked through its Internet site. In addition, a website design company in West Virginia reported higher demand for its services, and also noted more on-line contacts. Employment slipped, however, at a number of companies that relied heavily on summer workers as those jobs ended. Wages remained stable with the exception of high-tech positions, which continued to command wage increases. Looking forward, many contacts expected demand for their services to strengthen in coming months.
Manufacturing
Activity at District factories remained generally strong since our last report. Growth in manufacturers' shipments picked up in August, but growth in new orders sagged. Contacts in the food, tobacco, and industrial machinery industries reported particularly strong business activity. In contrast, some contacts at furniture, chemicals, and rubber products manufacturing facilities noted that their shipments fell slightly in recent weeks. One furniture manufacturer told us that furniture sales had declined markedly since early May, when his company was running factories on overtime. Now, he said, they have laid off employees and are operating several plants only four days per week. In labor markets, manufacturing wages grew more slowly in August, while employment was little changed. Despite higher wages, prices for manufactured goods rose only slightly.
Finance
Loan officers reported that generally strong business conditions and lower interest rates contributed to somewhat higher demand for loans in recent weeks. Commercial bankers said that business loan demand was being driven mainly by businesses'expansions. A commercial lender in Greenville, S.C., noted that some companies that had put expansion plans on hold two months ago were now going ahead. Competition for commercial loans remained intense; a Norfolk, Va., lender said that some of his competitors were offering "crazy" interest rates and terms to attract business. Residential mortgage lenders reported a general increase in lending activity as mortgage rates eased in August. A Charleston, S.C., lender reported a recent spurt in demand for mortgages; in his words, business was, "as good as [it] can be."
Real Estate
Residential realtors reported a pick-up in real estate activity in August. A realtor in Columbia, S.C., described sales activity as strong and added, "Now that the fear of rising [interest] rates is gone, people are back in the market." Realtors in Charleston, S.C., and in the District of Columbia noted that sales of upper-end homes remained brisk. In contrast, corporate layoffs in Greensboro, N.C., resulted in weaker sales of upper-end homes in that area. Wages in the construction sector moved moderately higher, while building materials costs were level for most items, and lower for lumber and sheetrock.
Commercial realtors in the District reported little change in real estate activity in recent weeks. While the market for Class A office space remained tight, some realtors indicated that speculative office development had slowed. But some exceptions were apparent. A contact in Charlotte, N.C., noted an increase in office construction in suburban areas. Lower vacancy rates for warehouse space were said to be placing upward pressure on rents in Maryland, and land for construction of additional warehouses was reported to be in short supply. Rents for office space were generally little changed, but District of Columbia realtors noted that some landlords had raised security deposits for "dot-com" companies in anticipation of a shakeout in that sector.
Tourism
Heavier-than-normal rainfall throughout the District caused tourist activity to soften in August. According to contacts in Virginia Beach, bookings for the Labor Day weekend were initially somewhat lower than last year and the inclement weather exacerbated the decline. A hotelier on the Outer Banks of North Carolina said that tourists appeared hesitant about booking late-summer vacations in the area, fearing a recurrence of the severe storms that struck there a year ago. A resort manager in Virginia noted that occupancy rates were lower, in part because companies were holding business conventions later this year. Despite the August softening, expectations for tourist activity during the next six months remained good.
Temporary Employment
Demand for temporary workers remained generally strong in recent weeks. Administrative workers with computer skills and light industrial workers continued to be in high demand. A Maryland contact said that he had seen an across-the-board need for workers--from entry-level administrative to high-end technical. While wages in many areas were reported to be little changed, the manager of an employment agency in Hagerstown, Md., and an agency contact in Charleston, S.C., said that wages were moving up because of the widespread higher demand for workers in those areas.
Agriculture
Above-normal rainfall in late August and early September brought relief to drought-stricken areas in the District but increased concerns about disease and crop quality in other parts of the region. While improved soil moisture levels helped drought-stricken areas of South Carolina, rainy weather and wet fields delayed corn and hay harvests and contributed to fungal disease in peanuts in other areas. Despite the rain, farmers made good progress in harvesting tobacco, peaches, and apples. District agricultural analysts expect higher yields this year for corn in Maryland and North Carolina and soybeans in Maryland and South Carolina.
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Cleveland