WASHINGTON (MNI) – The following is the text of the Federal Reserve
Beige Book survey Fifth District summary, published Wednesday (part 1
of 2):

FIFTH DISTRICT-RICHMOND

Overview.

Economic activity in the Fifth District continued to post moderate
gains across most sectors from weak levels. Manufacturing continued to
be a bright spot, with contacts indicating slow-but-steady expansion
across a broad range of industries. Banks and other services-providing
firms, also cited improvements over the last six to eight weeks, with
scattered reports of weaker activity. For example, several professional
services firms reported rising revenues, but an executive at a large
healthcare organization stated that demand was weaker than expected. The
real estate market sent mostly positive signals. In a striking change
from recent months, several contacts noted a pickup in the high end of
the market. Retail sales activity was virtually unchanged in recent
weeks, but auto sales improved. While several temp agencies reported
improving demand, other labor market indicators were weak. Slight
increases in commodity and component prices were noted by manufacturing
and services firms.

Retail.

Retail sales generally flattened in recent weeks, but there were a
few reports of improvement. Department stores overall reported no change
in sales, and retailers in areas with high unemployment indicated that
their sales continued to be held down by jobless customers scrimping on
purchases. However, a retail representative in central Virginia noted an
uptick and said that people were now spending on a wider variety of
goods compared to a year ago when customers were “just buying the bare
essentials.” In addition, grocery, home improvement, and garden supply
retailers reported accelerating sales. Auto dealers in West Virginia and
South Carolina also reported a pick-up in sales and said that
manufacturers have not been able to gear up fast enough to keep up with
dealers’ orders for domestic and foreign nameplates. Other bigticket
sales remained in a slump, however. Retail prices rose slightly faster
since our last report.

Services.

Revenues at services-providing firms rose more quickly than last
month, although a few contacts continued to report weakness.
Transportation services firms reported stronger business, and
enplanements rose at District airports. Executives at trucking firms
noted stronger revenues, in part from the ability to raise prices in
some markets. In addition, contacts at professional, scientific, and
technical services firms reported rapidly rising revenues, and call
centers in North Carolina cited expanded hiring. In contrast, an
executive at a large healthcare organization noted that customer demand
for services was “a little soft” relative to plan because the flu season
was not as severe as expected. Services firms related to building
construction also continued to report a down market. Aside from
trucking, price changes at services firms were essentially neutral over
the last month, with most contacts reporting no change in recent weeks.

Manufacturing.

District manufacturing activity continued to expand. Overall,
manufacturers reported that shipments edged higher and new orders
advanced at a solid pace, while employment grew at a slower pace. An
auto parts supplier noted that orders continued to increase more quickly
than expected, which resulted in rush orders for foreign and domestic
materials. Similarly, another manufacturer of automotive components
indicated that his company was still experiencing significant unforeseen
demand from the auto sector. He also noted that his non-auto related
business was finally starting to recover as well. Moreover, a number of
lumber companies reported their orders had increased because their
customers were rebuilding inventories. Accordingly, the increased demand
resulted in a small profit for their firms for the first time since
early 2007. A manufacturer of door components reported that revenues
were 10- 15 percent above the lows of 2009. Contacts also stated that
raw material lead times had increased. Prices of raw materials increased
at a slightly quicker pace than a month ago, while finished goods prices
grew at a somewhat slower pace than earlier.

Finance.

Banking activity in the District remained generally weak since our
last assessment. However, several respondents stated that their lending
activity over the last few months was up moderately in at least some
segments of their markets. Consumer lending was described by one banker
as up from earlier in the year and another banker cited increased use of
credit cards. Industrial loans were little changed in recent months, as
businesses kept a tight control on inventory and were cautious about
investing in new equipment. Several mortgage bankers stated that
applications dipped after the homebuyer tax credit expired at the end of
April, but one banker noted that activity recovered in the second half
of May. While some bankers saw no improvement in higher-priced home
sales, several lenders reported significant improvements in that segment
from extremely low levels. Credit quality was little changed, although
one banker reported increases in 30-day delinquencies. Other bankers
stated that, on balance, quality was improving because bad loans were
being taken off their books.

Real Estate.

Residential real estate markets across the District continued to
strengthen. While most of the gains were in the low-to-mid price range,
activity inched up for higher priced homes in several areas. Properties
in the mid-to-upper price range sold very quickly in the D.C., area,
with the best sellers in the $800k-$1.1M range. The inventory of unsold
homes there was at its lowest level in eighteen months. Several agents
reported getting multiple offers on properties. Concern that interest
rates would rise once the homebuyer tax credit expired had pushed some
people to purchase homes. House prices held steady across much of the
District, but they increased somewhat over the last 30 days in
Fredericksburg, Va., where a shortage of inventory and multiple
contracts were noted.

Commercial real estate agents reported modest improvements since
our last report.

For example, vacancy rates for office space in Columbia, S.C., and
Charlotte, N.C., markets decreased due to positive absorption, but were
stable in Richmond. Leasing activity eased in Charlotte and demand was
unchanged at a weak level. A slight pick-up in retail leasing was
reported in Richmond. Rental rates remained stable in most sectors. New
construction remained generally nonexistent. However, a construction
contractor reported starting a 100- percent speculative office building
in a suburban area and indicated he would like to start a second one in
the near future. He felt confident that the new buildings would attract
tenants shying away from more urban locations.

(part 1 of 2)

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

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