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Beige Book Report: Richmond

January 21, 1998

The Fifth District economy continued to expand moderately in late November and December, despite a sharp slowdown in the manufacturing sector. Service sector growth picked up in recent weeks and retail sales growth remained healthy. In the financial sector, lower interest rates boosted demand for home mortgages, while demand for consumer and commercial loans was steady. Housing activity was mixed; home sales were somewhat higher but housing starts were flat. The commercial real estate sector remained generally robust, although new construction activity continued to be modest in most areas. Labor markets were tight throughout the District. Wage growth picked up in the retail sector, but contacts reported only scattered wage pressures otherwise. Prices in the retail, services, and manufacturing sectors grew at somewhat slower paces than in our last report.

Retail
Fifth District retailers reported that sales growth remained strong during late November and December. Late November sales rose substantially, but contacts said that aggressive discounting was required to keep cash registers ringing in December. Retail prices increased more slowly than in our last report. Although retailers continued to report difficulties finding qualified workers, seasonally-adjusted employment in the sector edged higher and wage growth accelerated.

Services
Activity in the service sector grew at a somewhat faster rate since our last report. Contacts indicated that revenues grew more quickly. Employment growth held steady during November, but picked up in December. The overall rate of wage growth remained strong. Looking ahead, service producers remained optimistic about demand in coming months, though perhaps less optimistic than in our last report.

Manufacturing
The pace of manufacturing activity in the Fifth District slowed considerably since our last report. Shipments edged lower, and new orders and order backlogs fell sharply in December. Several textile producers indicated that their orders had been trimmed by increased Asian competition, but other manufacturers saw no Asian influence on their orders. Raw materials and finished goods inventories grew more rapidly and remained well above manufacturers' desired levels. Employment and wage levels changed little. Many contacts continued to express frustration over shortages of skilled labor; others, however, suggested that labor availability had become less of a problem in recent weeks. Price growth for both raw materials and finished goods moderated. Manufacturers' outlook for the next six months continued to be optimistic; with orders and shipments expected to rise.

Tourism
Tourist activity was mixed during December and early January. Several sources from coastal areas indicated that unseasonably warm weather in early January boosted their business, while respondents from mountain areas reported that the recent "heatwave" and heavy rains hampered their business. One contact from a popular ski resort in Virginia noted that business was down 20 to 25 percent from a year ago. In West Virginia, however, the weather was more seasonable and bookings at ski resorts remained strong and in Washington, D.C., record visits at the Smithsonian Institute were noted.

Ports
Activity at District ports was unchanged to slightly lower since our last report. Decreased shipments of agricultural products, steel, and synthetic rubber pushed exports down somewhat, while reduced inbound shipments of tobacco, steel, and lumber products limited gains in import levels. Port operators indicated that developments in Asia had not noticeably affected export or import volumes.

Temporary Employment
Growth in the demand for temporary employees was slightly stronger during late November and December. Sources said that although some employers normally take a "breather" in their hiring at this time of the year, demand remained "surprisingly strong" compared to past years. Despite this, only scattered wage pressures were reported, mostly for jobs requiring a high degree of technical skill.

Finance
Mortgage lending rose moderately in recent weeks but commercial and consumer loan activity was little changed. Bankers reported that lower mortgage rates had spurred greater interest in home refinancings and fixed-rate mortgages. While competition for commercial loan accounts, particularly in the Carolinas, remained intense, contacts indicated that pricing spreads have been maintained. However, a Charleston, S.C., banker remarked that the intensively competitive environment had led his bank "to be more accommodating with loan covenants."

Residential Real Estate
Housing activity across the District was mixed since our last report. Realtors in Richmond, Va., Greensboro, N.C., and Greenville, S.C., reported that home sales picked up, in part because of new companies moving into their areas. Sales of higher-priced homes were said to be particularly strong in some areas; a Virginia realtor noted that "baby boomers want all the frills in their dream homes." Homebuilders, however, saw little change in housing starts and reported increased buyer interest in lower-priced houses. A West Virginia builder characterized his local market as one of "mostly bottom-feeders"-- individuals interested in purchasing lower-priced homes. In contrast, a contact from North Carolina said that prices of starter homes in that area had recently soared.

Commercial Real Estate
Since our last Beige Book, commercial real estate activity remained strong. Low vacancy rates persisted in many urban areas. Contacts continued to report only modest amounts of new construction in most areas, much of it small, pre-leased offices. But a few big projects were set to begin. In Richmond, Va., a $3 billion computer chip plant received the green light after being on hold for several years. In the office sector, both Washington, D.C. and Maryland saw a tightening of Class A space. To help accommodate the demand for premier space in those areas, contacts noted that some Class B and C space was being renovated. In addition, a West Virginia realtor reported the conversion of older buildings to offices in his area.

Agriculture
Generally dry weather allowed District farmers to make significant headway in their fieldwork in December. Crop harvesting neared completion in most areas according to District contacts, although there were scattered reports of corn and soybeans remaining in fields. With harvesting nearly complete, analysts believed that yields of most crops would fall short of 1996 levels. As of late December, winter wheat emergence was only slightly behind the five-year average, and small grains were said to be in generally fair to good condition. In the livestock sector, fourth quarter hog inventories fell in several District states; a North Carolina analyst attributed the decline to increased shipments rather than to planned reductions.