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Signs of slowing or contracting economic activity became more prevalent in the Fifth District since our last report. Manufacturing activity continued to expand, but a slowdown in the pace of expansion that began several months ago continued into August. Tourism also improved, although discounting was often needed to attract visitors. We received mixed reports of activity at services-providing firms, while retailers reported flat-to-weakening sales over the last month. The financial and real estate sectors generally remained soft, with several reports by residential Realtors indicating further declines in both closed and pending home sales in recent months. The agricultural sector enjoyed increased rainfall, but the benefits were too late for some crops. Survey respondents in the retail sector cited cuts in the number of permanent job hires, but temp agencies noted increased demand for workers from the manufacturing sector.
Retail
Retail sales sputtered in August, with most merchants reporting either flat or contracting activity. Sales declined at several building supply businesses as well as lawn and garden retail establishments. An executive at a hardware store chain in central Virginia commented that sales were flat, and he had redistributed inventory across store locations as part of an ongoing cost reduction plan to survive the weak housing market. The store manager for a discount chain store in central North Carolina reported erratic apparel sales; however, he and several other retailers were relieved that early results from back-to-school sales on other items were at least satisfactory. Although grocery store sales generally grew, an executive at a Southwestern Virginia location reported that "margins are under constant pressure." Big-ticket sales remained weak, according to several contacts. A car dealer in the Tidewater area of Virginia and another in the South Carolina Piedmont indicated that their dealerships were seeing gradual improvement. However, contacts at other dealerships reported a slowdown in sales. In addition, several contacts at department stores expressed worry about soft holiday sales later this year. Our survey respondents indicated that retail price growth was moderate; average wages in the service sector rose.
Services
Services-providing firms also gave mixed reports. Contacts at healthcare organizations noted that demand was typical for the summer, while airport officials and electrical contractors saw a small increase in demand for their services. A telecommunications contact reported accelerating revenues, while several administrative-support firms cited flat or slowing revenue growth. Local officials in Norfolk, Virginia noted that a recently announced shut-down of major military facilities would affect a large number of civilian contractors. Community leaders indicated that they will be vying for other military projects. Price growth slowed slightly at services firms in recent weeks, according to survey respondents.
Manufacturing
District manufacturing activity continued to expand in late July and August, but some sources indicated a slowdown in demand over the last month. A chemical manufacturer commented that new equipment was being installed at his company with the expectation that the economy would continue to grow. Moreover, a packaging manufacturer informed us that demand was stronger at his company, and a parts supplier indicated that raw material inventories had decreased and his suppliers were having a hard time keeping up with demand at his firm. He added that his company was working Saturdays to meet demand and that inventories of finished goods remained below desired levels. A majority of survey respondents reported that shipments, new orders, and employment continued to grow, but at a slower pace than a month ago. Some declines were reported; for example, a manufacturer of exterior doors for residential housing said that all activity had ground to a halt in the building products industry. He noted that the slowdown started in May and continued through August.
Finance
Banking was widely described by contacts as weak and relatively unchanged since our last assessment. Several bankers noted that consumer loan demand remained soft, as consumers continued to reduce debt, and mortgage demand centered mostly on refinancing with existing clients. Small business loan demand was also described by most contacts as soft, as firms struggled with weak demand. One community bank official stated that auto dealers had difficulty obtaining floor-plan loans, even though they needed more inventory to support the current sales rate. A bank economist reported some improvement in equipment expenditure financing, which was mostly to replace out-dated technology and not to increase capacity. Tighter controls on credit cards, such as higher fees on overdrafts, were cited by one banker as limiting consumers' credit card usage. Credit quality was mostly unchanged, with several bank contacts noting no increase in delinquencies or late payments.
Real Estate
Real estate markets remained weak over the last four to six weeks. There were more reports of declining activity, especially in the residential sector. For example, several Realtors indicated that closed sales were flat to down in July and pending sales dropped in August both from a year-ago and on a seasonally adjusted month-over-month basis. Moreover, the home sales that did occur were dominated by foreclosure and short sales. A housing expert in the Hampton Roads area of Virginia stated that, with mortgage rates low and prices still falling, buyers were very picky and in no hurry to close deals. Several Realtors complained about buyers having more difficulty obtaining financing and about the amount of time required to get mortgage loan approvals. One Realtor stated that sales activity would benefit substantially if banks could speed up the process. Most Realtors cited continuing declines in home prices. Most Realtors said that the high-end market was extremely sluggish and often limited to corporate relocations. In contrast, however, a Realtor in the greater Washington, D.C. area reported that July sales were stronger than expected and that homes below $250,000 generally moved quickly.
On the commercial side, construction remained soft and there was continuing downward pressure on rents. Several commercial Realtors stated that both uncertainty about the economy and confusion about recent reforms were key factors in holding back sales and construction. Most contacts noted that vacancy rates were still rising. One developer attributed less demand for new building space from small business startups to the fact that laid-off workers were facing diminished savings due to the severe stock market and real estate slumps. In addition, a paving materials supplier reported that local sales of crushed stone, which is used as a base for laying concrete and other paving materials, were non-existent. State and local governments cut back construction projects as well, according to contacts.
Tourism
Tourist activity strengthened across the District since our last report. Along the District's coast, a contact in Myrtle Beach said that visitations were up in recent weeks, compared to a year ago, with slightly longer stays. Considerable increases in discretionary expenditures also positively affected the retail and hospitality sectors. However, reports from Baltimore, Washington, and Charleston, S.C. indicated that, while tourism picked up, stays were shorter and spending was lower than in the past. A manager from Virginia Beach also stated that, even though hotel bookings were up, vacationers were shortening their length of stay. A contact from Charleston, S.C. mentioned that hotel occupancy was up substantially from a year ago, although hotels were discounting to get people "in the door." People were often described as "taking staycations"-- visiting nearby attractions, such as theme parks, museums, and historical areas, rather than taking vacations away from home. Contacts both along the seaboard and at mountain resorts reported that bookings for the Labor Day weekend were stronger than a year ago.
Labor Markets
Reports on Fifth District labor market activity was generally mixed in recent weeks. In service sector labor markets, survey respondents said that hiring was flat at services-providing firms, while retail job cuts were widespread. However, survey respondents from most manufacturing industries indicated continued mild expansion of employment and weekly production hours, but average wages slowed. Several contacts at temporary employment agencies reported generally stronger demand for temporary help since our last report, particularly in manufacturing. For example, a contact at an automotive plant told us that they had hired both additional full-time employees and temporary labor. Increased demand for temporary workers was reported by a wide array of service industries, including professional services, life sciences, banking, health care, and government.
Agriculture
In many sections of the District, soaking rains helped to refresh crops and improve pasture conditions. It was too late for corn, however, and in some areas of Virginia farmers shifted drought-stricken corn fields to cover crops and small grains. Analysts in Virginia reported that the corn harvest had very poor yields. Elsewhere in Virginia, flooding resulted in damage to silage corn, tobacco, vegetables, and both standing and baled hay. In contrast, the corn harvest was ahead of schedule in the Carolinas, although heavy showers hampered field work for some growers in both states. In West Virginia, pasture conditions ranged from very poor to excellent, but most fields were reported to be in fair to poor condition. Also, cattle producers in Virginia continued to cull herds due to reduced feed supplies. On a brighter note, ninety-four percent of peaches had been harvested in South Carolina, and the watermelon and cantaloupe harvest was nearing completion in that state. In Maryland, the peach harvest was 80 percent completed and apples were 20 percent harvested.
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Cleveland