The following is the text of the Federal Reserve Board’s Fifth District-- Richmond.


Overview. Fifth District contacts provided mixed reports on economic activity since our last assessment. Retailers reported strengthening in consumer spending over the last month, and non-retail firms cited increased activity, despite end-of-June power outages caused by severe storms. Bookings remained solid according to tourism contacts, even as vacationers continued to hunt for bargains. Residential real estate was described as slightly improved overall, although many areas continued to experience weakness. Additionally, contacts at District ports noted some improvement in both import and export volumes in recent months. In contrast, manufacturers reported a marked weakening in orders and shipments in June, following strengthening earlier this year. Employment agencies cited a slight slowdown in demand for workers, with the notable exception of high-skill occupations. Some softening also occurred in commercial construction in recent months, mostly concentrated on the government side of the market, with private demand remaining generally unchanged. Most lenders reported flat or weakening demand for loans; however, a few bankers noted a pickup in mortgage and small business lending. Price change was modest, although retail prices increased somewhat more rapidly than earlier.

Manufacturing. District manufacturing weakened in June, following six months of moderate expansion. A manufacturer of industrial machinery reported that business had slowed during the last month and that major customers were withholding payments. A producer of gas turbines said that economic problems in Europe had reduced his company’s exports by fifty percent. A textile producer noted that his company had reduced capacity at a District plant by approximately twenty percent due to decreased demand from domestic customers. Backlogs of orders had gone from four weeks to day-by-day, according to a modular home manufacturer. He added that his company was not in a position to raise prices to keep up with costs. A producer of electrical equipment mentioned that orders had decreased noticeably during the last month, and that several large customers had scaled back their order projections due to recent economic uncertainty. In addition, several aerospace manufacturers said that airlines were making money but were not adding capacity. Our latest manufacturing survey indicated that prices of raw materials and finished goods grew more slowly over the past month.

Port activity in the District has continued to improve. Several contacts reported that both the number of containers and total tonnage were at or near record levels. One official stated that recent import growth, led by autos and paper products, has been closing the gap with the solid pace of export growth at his port. Imports of auto parts and assembled autos were also helping push some ports to record levels. Port officials noted that imports of machinery had increased, and exports of agricultural equipment were showing unusual strength for this time of year. One port official noted a slight softening in May’s trade activity, which was not expected to continue. A contact reported that freight carriers were having limited success sustaining recently announced rate hikes, due to excess shipping capacity in the industry.

Retail. Sales among District retailers strengthened since our last report, buttressed by big-ticket purchases. Spending picked up for construction-related items, computers, and big-ticket items at home and garden stores. Sales of automobiles also rose, according most dealers we contacted. However, shopper traffic generally waned, according to our most recent survey, and inventory accumulation picked up. Distributors of non-durable goods and building materials merchants reported improved revenues since our last report. Grocery wholesalers also saw revenue gains. The store manager of a large sporting goods establishment noted that sales were up, even with less traffic. He commented that cotton prices had declined, although freight shippers continued to apply gas surcharges. Large areas of the mid-Atlantic lost power for up to a week following strong storms at the end of June; a retailer in the Richmond area reported having to place extra orders for generators as his stock depleted. He noted that bottled water sold out quickly, and sales of battery operated lights and flashlights rose sharply. Retail prices increased at a somewhat faster pace since our last report.

Services. Non-retail services providers reported stable to slightly greater revenue gains in recent weeks. In our most recent survey, revenue improvement was strongest among professional, scientific, and technical firms. A financial services broker in central Virginia cited stable demand, but also noted a general nervousness among his clients regarding “the European situation.” Healthcare services providers generally reported little change in demand. Following the Supreme Court’s healthcare decision, organizations continued to prepare for upcoming changes. A restaurant owner stated that the recent power outage cost him “some product,” and reservations dropped because his phones were down for several days. Price increases at services-providing firms slowed in recent weeks.

Finance. We received varied reports on loan demand since our last assessment. Characteristic of many anecdotes, a Maryland banker described his lending activity as “very slow, very flat,” with most loans going to refinancing. A loan officer in North Carolina indicated that, while his pipeline was slowing, real estate loan applications for construction projects had improved and even mortgage applications were beginning to “show some life.” An official for a large bank noted modest growth in new loans that were mostly from home buyers and small businesses, while consumer installment loans were down. A banker in western Virginia stated that loan demand for capital improvements from local governments was increasing as federal stimulus funds run out. Finally, an official for a midsize commercial bank reported that his market area seemed to be “moving sideways,” with borrowers shifting among local banks to get refinancing at lower rates. Most bankers described their lending standards as unchanged, although one lender noted that competitive pressures for commercial loans had caused some easing in standards to capture high-quality loans.

Real Estate. Residential real estate activity improved slightly since our last report. A Realtor in the Charlotte area said that homes in the mid-price range were selling quickly in her area and that prices were rising. An agent in the D.C. area indicated that properties in the $800,000-plus range were selling somewhat more quickly, and added that continuing low inventory and low interest rates should contribute to strong sales throughout the summer. Moreover, a Maryland contact noted that trends in the housing sector were generally showing some improvement, with sales and prices rising and active inventory declining. However, a South Carolina Realtor reported that housing in coastal areas was not doing well, which he attributed, in part, to an inventory overhang that was placing downward pressure on prices. A North Carolina housing agent mentioned that the state had proposed a cut in unemployment benefits, which threatened to put more stress on the slowing housing market.

Commercial construction and real estate activity softened in recent months. While most construction contacts reported little change in private sector activity, a solid majority noted a decline in government demand. A Virginia developer described the industry as “sliding into a trough” over the last few months and expected demand to remain weak through the summer and fall. Several contacts said that retailers who were new to the area were most often opting to renovate existing sites rather than to build new stores. A contractor in the D.C. area noted that both large and small chains were expanding and, in some cases, building new stores. Several District Realtors noted that medical office buildings were an exception to the overall weakness in their markets. A West Virginia Realtor noted a sharp increase in interest in commercial buildings, but so far has had little success closing any deals. Contractors reported that the cost of materials had increased, but they were able to pass through most of the increases.

Labor Markets. Fifth District labor market activity was slightly weaker since our last report. Several contacts at employment agencies characterized demand as somewhat slower, compared to a year ago, with one agent noting that the “hiring surge” earlier in the year had slowed. Other employment agents cited strong demand for workers with high-end IT and manufacturing skills. For example, a Hagerstown agent said that, while overall demand for entry-level workers had tapered off, clients were still looking for middle-management, supervisors and highly skilled workers. Similarly, a furniture manufacturer reported difficulty finding skilled employees through temp agencies, which he attributed to potential workers dropping out of the work force or signing up for unemployment. However, a contact for an employment agency in North Carolina noted some improvement in hiring activity, with an increase in temp-to-permanent status. According to our latest survey, wage gains in both the manufacturing and service sectors were a bit more widespread than a month ago.

Tourism. Hoteliers reported solid summer bookings since our last report. A contact on the outer banks of North Carolina said tourist activity remained strong following an early “jump-start” to the vacation season. She noted that restaurants in that location were busy, but that tips were a bit lower than usual as families tried to vacation on a smaller budget. Hotel managers said vacationers continued to seek bargains, and corporate and military travel had softened in part because of pending government actions affecting spending decisions. A Virginia hotel contact reported a massive increase in bookings following severe storms at the end of June, which caused local power outages that lasted past the July 4th holiday.

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