The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.
Business conditions have improved in the Fifth District economy since our last report. Manufacturing activity continued to advance, although somewhat more slowly than at the beginning of the year. While trade activity increased, imports improved somewhat more slowly than exports. Retail sales activity rose sharply, as shopper traffic increased and big-ticket sales strengthened. Services-providing firms also recorded solid revenue growth in recent weeks, and unseasonably warm weather bolstered tourism. Bankers reported modest gains in most types of lending; however, other than refinancing, the amount of mortgage lending remained relatively weak. Nonetheless, Realtors noted an increase in sales of existing homes, and contractors reported an uptick in new home construction. Commercial real estate activity also improved moderately across most segments of the market, although contractors reported fewer government- related new construction projects. Hiring activity picked up, especially for temporary workers. Finally, the pace of price increases rose marginally over the last month, according to our latest manufacturing and service sector surveys.
Activity expanded moderately over the last month. However, shipments, new orders, and employment all grew at a somewhat slower pace since our last report, with several contacts citing the increasing cost of petroleum-based products as a major factor affecting their business. An automotive parts manufacturer reported that customer orders remained elevated, but he was concerned that orders and sales could weaken if recent high fuel prices persist. A contact at a lumber mill stated that he had seen improvement in both sales and output prices since the beginning of the year. In contrast, a paper producer said that his firm was experiencing a significant decline in business, adding that most of his employees were currently on a thirty hour workweek. A textile manufacturer said that synthetic raw material prices were ―soaring,‖ but that it was difficult to pass these increases through to customers. According to our recent survey, prices of both raw materials and finished goods grew at a somewhat quicker pace than a month ago.
Port activity in the District continued to strengthen since the end of last year, with exports slightly outperforming imports. Several port authorities reported that roll-on, roll-off stock was up. Indeed, several officials noted that autos and automotive parts were key products boosting both imports and exports. Exports of bulk goods, including coal, wood by- products, and agricultural goods, continued to be robust. An executive at a large container carrier noted that downward pressure on shipping rates persisted due to excess capacity. Rising fuel costs were cited as causing serious problems for both land and ocean shippers. However, most port contacts expected that exports and imports would continue to strengthen.
Retail sales strengthened markedly since our last report. Gains were led by rising shopper traffic and an uptick in big-ticket sales, while inventories flattened. A store manager in West Virginia remarked that unusually warm weather had caused sporting goods sales to pick up earlier than normal. Additionally, home improvement sales were up at most of the merchants polled in our latest survey. A contact at a home improvement chain noted particular strength in sales of kitchen remodeling components. Higher gasoline prices led to freight surcharges, according to several contacts. Sales of both domestic and foreign cars remained strong, as consumers replaced aging vehicles and looked for better fuel-efficiency. Consumers continued to bargain intently, with a North Carolina furniture retailer commenting that margins were “the tightest they’ve ever been.” A contact at a Virginia food chain remarked that customers were purchasing more selectively, as retail prices accelerated. However, a home appliance retailer noted that consumers absorbed significant price increases.
Revenues expanded at service-providing firms, despite concern about the rising cost of gasoline. Contacts at construction- related service firms reported an increased volume of business, and sales activity picked up at several advertising firms and travel services. Information technology firms also noted greater demand, particularly from the healthcare industry. Stronger demand allowed some trucking firms to raise prices to offset fuel cost increases. However, a trucking executive indicated that the shortage of drivers remained a serious concern. A manager of a restaurant chain in Maryland noted that people were eating out more, but area restaurants still needed to increase their use of incentives to compete for customers. Finally, a recent survey indicated that the pace of price change inched up at services-providing firms.
Modest improvements in lending activity were widely reported since our last assessment. Officials at several large banks reported slow upward movement in commercial lending, particularly to small businesses that were financing inventory and new equipment. Several community banks around the District noted an increase in commercial lending for office and retail space. A lending officer in Richmond reported further strength in consumer borrowing, especially to meet home improvement and auto financing needs. Many bankers stated that mortgage financing remained weak, with the exception of home refinancing. However, several bankers from across the Districted noted a slight pickup in new home loans beyond seasonal norms. Competitive pressures among banks remained intense, putting downward pressure on rates. Several bankers reported that they were offering easier terms to attract new commercial borrowers. Loan quality and payment timeliness continued to improve, according to most bank officials.
Residential real estate activity showed promising signs of recovery since our last report. Several contacts stated that they were beginning to see a “ray of hope” in the housing sector, and several builders reported starting construction in areas that had not seen new building activity for several years. For example, a source from Charlotte said that real estate was starting to move again in his area, and another North Carolina contact described multi-family housing activity, particularly for senior citizens, as being “on fire” in recent months. Lower inventory of both new and existing homes was reported in northern and central Virginia, with contacts noting that “days on market” were down as well. Moreover, a few contacts noted that housing prices had stabilized and, in some markets, prices were beginning to trend upward. Some agents attributed the rise in sales price to greater buyer traffic as a result of unseasonably warm weather. Several Realtors reported sales of higher priced homes were faring better than other price categories. A number of Realtors held a positive outlook for expected sales.
Commercial real estate leasing and construction activity improved across most segments of the market since the beginning of the year. Several commercial Realtors reported solid increases in inquiries about availability of office and retail space, but only moderate growth in leasing of those properties. Still, leasing rates were firming, according to agents, due to the reduction in the number of attractive properties still on the market. Most contractors cited moderate increases in private sector construction projects. Unusually warm weather helped contractors finish projects ahead of schedule, but some contractors with weak backlogs sought to spread out work in order to keep their workforce active. In contrast, government sector projects declined dramatically, according to several contractors, although one builder noted an increase in demand for secondary education facilities. Both contractors and Realtors reported that access to financing continued to be limited, and the required paperwork was inhibiting completion of loans on a timely basis. Prices of construction-related goods, especially petroleum-based products, cement and drywall increased in recent months, according to contacts, with most having only minimal success passing through any cost increases.
Fifth District labor markets improved moderately in recent weeks, with several employment agencies citing strong demand for temporary workers. The increase in overall demand was attributed to a general strengthening in the economy and also to the opening of new companies, coupled with a revival in activity at previously dormant companies. Several employment agencies indicated that some of their clients remained uncertain about future demand, however, and preferred hiring temporary workers. A representative at a North Carolina staffing agency reported that demand for information technology workers was much higher than supply and that the gap was worsening. She added that schools did not have enough graduates to meet the demand in that sector. District manufacturers increased employment more slowly than a month ago, according to our latest survey, while wage gains picked up. Growth in employment and wages in the broad services sector nearly matched our last report.
Unseasonably warm temperatures contributed to strong tourist activity since our last report. A North Carolina contact from the outer banks cited exceptional attendance at early spring events. While beach house rental rates were unchanged in recent weeks, real estate rental companies were able to remove incentives that had been included since last autumn. In Washington, D.C., the atypical temperatures resulted in cherry blossoms peaking at the second-earliest date ever. Tourist- related businesses were busy and restaurants were full. This year marks the one-hundred year celebration of the gift of the cherry trees from Japan, with numerous special events planned, drawing a significantly higher volume of foreign visitors than normal. A contact described the crowds as “wall-to-wall humanity.”