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On balance, economic activity in the Fifth District edged lower in late April and May. Retailers reported declining activity in recent weeks, due in part to higher food and energy prices sapping consumers' available income. Home sales remained sluggish across most of the District, and commercial real estate leasing was soft. In addition, commercial lending eased further as some lenders tightened credit standards. Manufacturing activity also slipped, though several contacts noted that export demand continued to be a bright spot. Many services providers reported slower revenue growth in recent weeks, although some resort locations saw increased activity over the Memorial Day weekend. Manufacturers and retailers trimmed payrolls and services firms reported little new hiring activity. On the price front, contacts reported generally higher prices in recent weeks. Manufacturing contacts stated that rising energy and transportation costs were being passed through to final goods prices.
Retail
According to most retail contacts, sales declined in recent weeks. The general manager of a department store in an upscale area near the Washington, D.C., beltway told us that his customers were now waiting for clearance sales. At a sporting goods store in West Virginia, the manager said he was watching inventory levels, "with an eye towards a downward adjustment." Although contacts at District grocery stores reported more rapid revenue growth in recent weeks, a spokesperson for several retailers in central Virginia told us that "the same wallet is buying less" at grocery stores in his locale, leading to inventory adjustments. Sales of automobiles and light trucks generally remained in the doldrums, but a dealer in West Virginia told us his hybrid sales have risen more than 50 percent from a year ago. District retailers continued to cut jobs and wage growth leveled off. Retail prices, however, moved higher.
Services
Revenue growth slowed at services firms since our last report. A financial services executive in Baltimore, Md., and a central Virginia brokerage contact said that clients remained "very nervous." However, the Baltimore contact told us credit markets appeared to be improving in recent weeks. A contact at a national freight trucking business in North Carolina reported that recent bankruptcies in the trucking business led to a slight uptick in demand at his company. According to that contact, his company's profit margin shrank because higher diesel fuel prices were not entirely recovered through contracts. The one pocket of strength was telecommunications. Several contacts in that category reported a pickup in revenue growth. The
pace of hiring at services firms was nearly flat in recent weeks. Wage growth in the sector moderated and price growth was little changed since our last report.
Manufacturing
District manufacturers reported a modest decline in activity in May as new orders and shipments edged into negative territory. Contacts largely attributed the lower pace to weaker domestic sales. A manufacturer at a North Carolina apparel factory reported a boost in foreign sales, but noted that the advantage had been largely negated by increased raw material costs. Similarly, a furniture manufacturer in North Carolina reported that exchange rate movements were forcing price increases for imported products despite soft demand nationally. Respondents were noticeably more concerned about rising energy and transportation costs. An automotive parts producer in West Virginia echoed these concerns, describing the rate of increase as "alarming" with transportation costs, primarily fuel surcharges, continuing to increase almost daily. Accordingly, the price of finished manufactured goods rose somewhat across the District as producers found they could no longer simply absorb these higher costs.
Export activity at Fifth District ports "stayed strong" with notable outbound volumes of heavy equipment and full containers despite a dip in domestic auto shipments. Import volumes flattened since our last report. Inbound container ships remained near capacity, but imports of bulk building materials such as lumber and plywood continued to slump. Port officials reported that rising fuel costs persisted in recent weeks, but not enough to offset activity "as of yet."
Finance
Residential lending activity slowed a bit in recent weeks as the number of mortgage originations fell slightly and refinances continued to taper off. Contacts in Richmond, Va., Raleigh, N.C., and Hilton Head, S.C., reported a decrease in demand since early April, and a Charleston, S.C., lender said his firm had not seen the "normal pickup that comes with the spring buying season." Interest rates on mortgages were relatively steady, although a contact in Charlotte, N.C., noted rates had moved a touch higher in the last two weeks. Several lenders said they again reduced loan-to-value ratios over the last six weeks, while contacts in Hilton Head, S.C., and Charlotte, N.C., reported raising credit score requirements a bit further.
On the commercial lending front, reports on activity were mixed. In Charleston, W.Va., and Charlottesville, Va., contacts noted a slight pickup in activity, while other lenders covering the Carolinas and Virginia reported demand as steady. A Baltimore, Md., contact noted that "if they can, clients are holding off on transactions." Interest rates on commercial loans generally dipped since April. Lenders in Charlottesville, Va., and Baltimore, Md., however, reported that rates had edged
higher more recently but were "competitive for qualified clients." Reports on credit standards revealed modest tightening at some institutions.
Real Estate
While Fifth District Realtors continued to report generally sluggish home sales in recent weeks, marginal improvements in sales were noted by agents in Charlotte, N.C., and in Fredericksburg, Va. Other contacts noted that they were not seeing the kind of activity typical for this season. An agent in Greensboro, N.C., said he was "having a tough time getting sales," adding that negative press reports had people "still holding back." Inventory levels continued to swell in several areas in the District and a few agents told us they had noticed an increase in foreclosures. House prices remained relatively stable across most of the District in recent weeks. A Richmond, Va., Realtor noted that prices were more reflective of what buyers were paying two years ago.
Commercial real estate market conditions softened further. Leasing activity generally cooled across the Fifth District in late April and May. Contacts in Columbia, S.C., Baltimore, Md., and the Washington D.C., suburbs noted weaker demand for office space in their markets. However, contacts in Raleigh, N.C., and Charleston, W.Va., reported demand as steady. Leasing activity for retail space "slowed notably" in Columbia, S.C., and was "sluggish" in Richmond, Va. Vacancy rates were flat across most of the District, but edged a bit higher in the Washington, D.C., metropolitan area for both office and retail space. Rental rates were mostly firm, although contacts in Baltimore, Md., and Washington, D.C., noted an uptick in concessions being offered to clients. Financing remained a challenge according to contacts in Raleigh, N.C., and Columbia, S.C. Agents reported little to no new construction, and contacts in Baltimore, Md., and Washington, D.C., saw projects shelved until "at least next year."
Tourism
Tourist activity was mixed across the District since our last report. Contacts at mountain resorts in Virginia and West Virginia reported stronger bookings for the Memorial Day weekend compared to a year ago. A manager at a mountain resort in Virginia attributed the increase to exceptionally pleasant weather and families taking vacations closer to home because of higher gas prices. Tourist activity at coastal areas varied, however. A hotelier on the Outer Banks of North Carolina reported brisk restaurant sales and hotels and motels filled to capacity, while a contact in Virginia Beach, Va., noted a pullback in the number of visitors and the occupancy rate. Moreover, a contact in Myrtle Beach, S.C., told us that vacationers had reduced their average length of stay by one-third and their discretionary spending by 40 to 45 percent.
Temporary Employment
Fifth District temporary employment agents reported somewhat
weaker demand for workers in recent weeks. Contacts in Richmond, Va., and in Hagerstown, Md.,
told us that demand for workers had tapered off due to a general weakening in the economy. However, contacts in Raleigh and Cary, N.C., were optimistic that demand for workers would improve over the next several months due to the strength of their local markets, their staffing specializations, and the gradual increase in orders being placed by their existing clients. Demand for workers was strongest for warehouse and distribution centers, medical, mortgage, professional services and life sciences industries.
Agriculture
Cooler-than-normal temperatures in recent weeks slowed the planting and development of District crops. Soybeans, sweet corn, and cucumber plantings were well behind schedule in Maryland, while plantings of peanuts and soybeans were slightly behind in Virginia. Furthermore, corn was replanted in several counties of Virginia due to the cooler weather. Agricultural analysts noted that crop conditions remained in mostly good condition throughout the District, despite dry conditions in some areas of North and South Carolina. Small grain harvesting began in Virginia with the majority of the crop in good to excellent condition.
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Cleveland