WASHINGTON (MNI) – The following is the Beige Book section on the
Federal Reserve’s Fifth District, published Wednesday:

FIFTH DISTRICT – RICHMOND

Overview

Feedback on economic activity in the Fifth District continued to be
mixed since our last report. Activity at retail and services firms was,
on balance, flat to down. Manufacturing activity also edged down over
the last month, while port contacts gave mixed reports. Both residential
and commercial real estate activity was mostly unchanged from the weak
levels of the recent past, and several contacts stated that property
values had stabilized. Activity in the banking sector improved modestly,
however, led by gains in business lending and home refinancing. Tourism
continued to strengthen in the District, with bookings increasing over
the last month. Reports on labor markets varied, with permanent hiring
flat to down and temporary employment picking up slightly. Price and
wage growth in the services and manufacturing sectors remained subdued
since our last report.

Retail

Retail activity generally softened since our last report, although
a few contacts reported an uptick in sales. Several building supply
retailers reported declining sales revenues, while a central North
Carolina discount department store manager described sales revenues as
“steady.” A store manager in West Virginia indicated that back-to-school
sales were “good, but not shooting off rockets,” and a North Carolina
department store wholesaler said business had picked up. However, a
North Carolina furniture store manager said that local unemployment was
causing him to sell at close to cost. Indeed, big-ticket sales,
particularly among automobile dealers, fell sharply in our most recent
survey. One exception was a car dealer in West Virginia, who reported
that sales rose modestly. Recently polled retailers noted flat or
declining customer traffic, although a representative of central
Virginia merchants reported a modest increase in credit card use. Price
growth strengthened somewhat at retail establishments, according to our
District survey, while growth in average wages was little changed.

Services

Business activity at services firms weakened overall, although
several services providers reported rising revenues. Demand for
construction-related services was particularly soft, according to recent
survey returns. A contractor commented that he was taking jobs without
overhead or profit just to hold on to his subcontractors, while awaiting
a pick-up in business. According to contacts at healthcare systems that
we recently polled, consumer demand was steady, while changes required
by healthcare reform had mixed effects on their budgets. In contrast,
several high-tech firms reported stronger demand; executives expressed
concern about the stability of the economy, however. Price change at
services firms remained modest over the last month, according to our
latest District survey, and average wages grew slightly. A couple of
services providers stated that their wage increases were directed toward
keeping key employees rather than toward standard, across-the-board
increases.

Manufacturing: District manufacturing edged down in September after
expanding for the last seven months, with reports of sharp declines that
were partially offset by pockets of strength. Several textile and
apparel contacts described their business as having “no depth” and noted
that their customers expressed uncertainty about the direction of their
business. A tire manufacturer reported that a backlog of orders had
“tanked” and the company had cut production, noting that he did not
expect any improvement for the rest of the year. A manufacturer of
exterior doors for residential housing said that his firm had seen a
sharp drop-off in orders and shipments over the last several months,
with no indication that the trend might reverse. He anticipated that the
housing and building products sector would be anemic in 2011. However, a
furniture manufacturer reported an increase in orders and noted that his
customers said that Labor Day sales were better than anticipated and
held up throughout September. In addition, an auto parts supplier stated
that orders remained strong and had increased slightly over the last
month. Finally, our survey contacts reported that raw materials and
finished goods prices, as well as wages, increased at a slower pace than
in our last report.

Port activity in the District over the last three months was mixed,
with imports generally outperforming exports. Several port officials
stated that imports at their facilities were up slightly in recent
months, but exports had, at best, stabilized over the last few months.
However, exports of commodities were up, according to one port
authority, partly due to increased grain shipments to Russia and
Pakistan. Several sources stated that the peak season had come and gone,
with businesses ordering earlier than in past years and now becoming
cautious about building inventory until they have a better sense of
underlying demand over the remainder of the year. Some softness in
shipping rates was noted at several ports, but one shipper reported that
utilization rates of both ships and containers were “getting back to
full capacity.”

Finance. Lending activity around the District improved slightly,
according to most bank contacts. Several bankers reported that the
volume of new mortgage loans increased slightly in September, although
one banking executive noted that most home loans went to people moving
into the area. New mortgage activity at a major regional bank in the
District, however, was reported as flat in recent weeks. Most bankers
said that the bulk of mortgage lending was for refinancing, and one loan
officer noted that refinancing activity stopped abruptly whenever the
smallest uptick in mortgage rates occurred. Industrial loans were up
slightly for equipment as well as inventory, according to one lender,
while another banker reported very little commercial real estate
lending. Several bankers stated that the competition among banks for
quality loans was increasing. An officer reported that his bank had
lowered rates to recapture auto dealer floor plan loans that had been
lost to larger, more aggressive banks. An increase in merger and
acquisition activity was widely reported. Several bankers cited examples
of companies with strong balance sheets that were buying weaker
competitors. Most bank officials reported improved credit quality, with
a decline in both the number of foreclosures and late payments.

Real Estate. Residential real estate activity remained soft overall
since our last report, despite some signs of a modest improvement.
Several brokers reported that markets in their area were extremely slow,
although they cited prices as generally stable. A market analyst
reported that the number of houses that were under contract in Eastern
Virginia was down more than 20% from a year ago, while active listings
were up in excess of 10%. Moreover, the length of time needed to close a
sale was increasing sharply. In contrast, a Realtor specializing in
high-end properties noted that luxury homes in his area were selling,
but only among properties that had been heavily discounted. And a broker
from the Baltimore area reported a slight increase recently in the
number of mortgage applications.

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** Market News International Washington Bureau: 202-371-2121 **

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