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Economic growth in the Fifth District remained moderate in September and October, tempered by declining manufacturing output and sluggish retail sales. Manufacturing shipments, new orders, and employment fell in September, extending a pullback that began the previous month. In general, activity in the services sector expanded at a somewhat quicker pace but growth in retail sales remained spotty. Home sales continued to increase, as mortgage interest rates trended downward, but leasing activity in the District's commercial real estate sector was flat. Price inflation remained in check throughout the District's economy. In agriculture, crop harvesting was underway, but the prolonged drought led to lower yields in most areas.
Retail
Retail establishments in the Fifth District gave mixed reports on their sales growth in recent weeks. Several large department stores in the Carolinas reported that sales grew slightly faster, while retailers in the Tidewater area of Virginia noted little change in sales. In contrast, a contact at a builders' supply chain with stores throughout the District reported slower sales due to consumers' skittishness about the national economy. Automobile dealers told us that sales were mixed. An automobile dealer in Richmond, Va., reported record sales in recent weeks, and a Washington, D.C., car dealer said sales increased as a result of pricing incentives. Dealers in other localities, however, said that their sales declined. Fifth District dealers reported no negative effects from the lockout at West Coast ports.
Services
Services firms reported moderately higher revenues and a pickup in employment in the weeks since our last report. Freight companies said demand increased and several noted that the port closings on the West Coast had not affected their businesses. Healthcare services companies in Charlotte, N.C., reported a generally soft local economy, but steady demand for elective procedures. A contact at a financial services firm, also in Charlotte, said demand had picked up in recent weeks and that the company had started hiring again as a result. However, not all services firms experienced stronger demand. A financial services firm outside Washington, D.C., reported that their revenue growth remained sluggish, in part because the public was "not anxious to invest" right now.
Manufacturing
The District's manufacturing sector contracted again in September: shipments, new orders, capacity utilization, and employment all declined. Contacts in the apparel, furniture, and rubber and plastic products industries noted particularly sharp declines in shipments. Several textile and apparel manufacturers in North Carolina told us that diminished consumer confidence and a strong dollar continued to hamper sales growth, and an industrial machinery manufacturer said that September shipments fell to their lowest level in almost a year. However, there were a few bright spots in the otherwise sour reports--a producer of plastic products in North Carolina, for example, said there were "good quality" projects in hand and he expected business to pick up in the fall. Manufacturers told us they were doing little hiring and that wage growth in the industry was modest. Prices were reported to be rising at an annual rate of less than one percent.
Finance
District loan officers said that overall lending activity continued to rise in September bolstered by continued robust growth in residential mortgage lending. A banker in Greenville, S.C., said that demand for residential mortgages was "unbelievably strong" as refinancing continued apace. Another South Carolina banker told us that he expected strong residential mortgage refinancings to continue through the end of the year and he reported that he recently hired three new loan originators to handle the heavier workload. In contrast to the brisk pace of residential mortgage lending, commercial lending was sluggish, as businesses continued to shy away from borrowing in an uncertain economic environment. State government budget woes also caused a pullback in lending--a commercial banker in Richmond, Va., said that tight state budgets had resulted in some reduction in lending for highway construction projects.
Real Estate
Although the growth in home sales slowed somewhat in several areas of the District, residential real estate activity remained generally upbeat since our last report. A real estate agent in Richmond, Va., reported a "very active" housing market and noted that his agency's sales in September were 60 percent higher than a year ago. A realtor in Washington, D.C., said September sales were about 70 percent higher than a year ago and added that overall real estate activity remained "very, very strong." He said that while houses in his area were staying on the market a little longer now, he still had more buyers than inventory, even with rising home prices. But some signs of cooling began to appear. An agent in Timonium, Md. reported that job losses and economic malaise had made people reluctant to "venture out and buy." In addition, an agent in Richmond, Va., said that homes in the uppermost price ranges had stopped selling. There were signs that growth in the Greensboro, N.C., market had slowed as well; a realtor there suggested that layoffs in the textiles and furniture industry had taken the edge off the market.
Fifth District commercial realtors reported generally flat leasing activity in recent weeks. A contact in Raleigh, N.C., noted that when it came to leasing, "the word on the street was slow and cautious." Vacancy rates edged higher in all commercial segments, though the increase was smallest for retail space. Reflecting soft demand, rental rates edged lower across all markets and landlord concessions became more commonplace. A realtor in Columbia, S.C., reported that property owners had become "more open to negotiations in recent weeks." On a brighter note, realtors in Raleigh, N.C., and Northern Virginia reported a smattering of build-to-suit projects in the industrial and retail markets. Contacts from both sectors noted that the space was procured for local, not national clients.
Tourism
Tourist activity continued to be mixed in September. Contacts from both coastal and mountain areas told us that bookings for the Columbus Day weekend were stronger than a year ago. A hotelier at Virginia Beach said that the increased popularity of family reunions since September 11 had boosted business in her area. In contrast, a contact on the Outer Banks of North Carolina said that bookings had slowed and that tighter purse strings had led tourists to rent smaller vacation homes. Several tourism industry contacts also said that businesses were more discriminating in spending entertainment dollars. Looking ahead to the winter ski season, a manager at a resort in Virginia warned that the persistence of drought conditions and water restrictions might hamper snowmaking and limit ski operations this winter.
Temporary Employment
Contacts at temporary employment agencies reported that the demand for workers continued to strengthen since our last report, and they expected this trend to continue for the next few months. Agents across the District said their clients expressed an ongoing need for additional workers, particularly with the holiday season approaching. Contacts in Columbia, S.C., and in the Maryland-Washington, D.C., area said that the economies in their areas were improving, and they expected demand for workers to strengthen in coming months. Light industrial and administrative workers remained highly sought.
Agriculture
Drought conditions persisted in most areas of the Fifth District in September and many areas were under water use restrictions. With the exception of North Carolina, the harvesting of corn was ahead of schedule in the District. The apple harvest was under way in Virginia, but apples were smaller than normal because of the earlier dry weather. Yields from tobacco, cotton, and peanut harvests in Virginia varied widely from area to area. In Maryland, soybean yields were below par due to the dry conditions. District agricultural analysts reported that low forage supplies and higher feed costs led Virginia livestock farmers to continue to cull herds.
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Cleveland