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Contacts throughout the Sixth District suggest that economic activity was sluggish in June and July. Retail sales results were weak and volume remained supported by heavy discounting. The District's single-family housing market continued to perform well, whereas there was significantly less commercial construction than a year earlier. Manufacturing output continued to fall, resulting in further job losses. Loan activity was mixed; residential lending was strong, while commercial lending was slow. Business travel softened throughout the District, while leisure travel remained strong in south Florida.
Consumer Spending
Retail contacts across the District reported that sales during June were weak, but noted a slight improvement in early July. However, discounting has been widespread, and many retailers reported that inventories remained higher than desired. The outlook for retail sales in the third quarter remains subdued, but several retailers were hopeful that income tax refund checks would boost back-to-school sales.
Auto sales remained generally soft in June, although an increase in sales activity in early July was noted. Industry contacts indicated that regional sales for some manufacturers were weaker, and inventory levels higher, than in the nation as a whole. However, sales of luxury cars and some SUV models did improve in response to generous incentives offered by vehicle manufacturers. Sales of lower priced and fuel-efficient models have also improved.
Construction
Most areas of the District continued to post solid home sales in June, with particular strength in south Florida. Overall home construction and sales in June were near the high levels of a year ago. Neither real estate agents nor builders anticipate a sharp downturn in the market.
At the same time, the commercial real estate market continued to weaken. Sublease space has increased in both office and industrial markets across the District, resulting in higher vacancy rates and increased use of rental incentives. Office, industrial, and retail construction has slowed significantly and is expected to remain subdued through year-end. Few new commercial construction projects have been announced.
Manufacturing
Manufacturing continued to contract through July, and contacts noted that firms are holding back on capital investments because of the economic slowdown. Reports from Georgia, Tennessee, and Louisiana indicated ongoing problems in the textile and apparel sectors with mill closings and reduced factory workweeks. Further weakness was reported in the paper industry, although softwood price increases have stimulated the lumber industry. Some telecommunication firms continued to cut payrolls in response to reduced orders, and there was further vertical consolidation within the technology sector. In Louisiana, the petrochemical industry slowed because of higher input prices. Required environmental retrofits to refineries are producing some job growth, and vehicle production and component supply industries continued with expansion plans. Shipyards reported several new commercial and government contracts, whereas some pleasure boat manufacturers have cut production as a result of sluggish demand.
Tourism and Business Travel
Reports from the hospitality and tourism sector were mixed in June and July, with some strength in leisure travel and weakness in business travel. Contacts in south Florida reported that leisure travel remained healthy, equaling last year's record pace. In central Florida, resort tax collections were down from a year ago and occupancy rates have fallen. In other parts of the District, contacts noted that convention business was sluggish because of shrinking corporate travel budgets.
Financial
Recent loan activity was mixed. Residential lending remained strong in parts of the District with continued growth in refinancing. However, auto-related installment lending has slowed, and commercial lending for new construction and equipment purchases remained slow. Reports indicated a modest thawing in venture capital activity during June and July.
Wages and Prices
Most reports indicated that companies are handling the slowdown by cutbacks in hours worked and by eliminating temporary workers. Outside of manufacturing, layoffs are still the exception rather than the rule. Wage pressures continued to subside. Some contacts are avoiding new hires and have not replaced employees who have vacated their jobs. In the technology sector, employers have become increasingly cautious in their hiring decisions.
Contacts cited few instances of price escalation in June and July. Reports indicated significant energy price reductions and continued price discounting at retail stores. However, lumber prices in July remained higher than a year earlier, and drywall prices increased sharply during July. House prices and healthcare costs have also continued to increase.
Agriculture
Orange production in Florida is seen reaching robust levels in 2001/02 due to ample rain that drenched parts of the Southeast during June and July. However, citrus producers continue to contend with tree disease problems that may yet limit yields. Local peanut growers are also facing increased uncertainty. The peanut farm quota system is under congressional review and peanut exporters have experienced strong price-competition from producers in China and Argentina.
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Richmond