WASHINGTON (MNI) – The following is the text of the latest Beige
Book survey of economic conditions in the Federal Reserve’s Fifth
District, published Wednesday:

FIFTH DISTRICT – RICHMOND

Overview. Fifth District economic activity improved modestly since
our last report. Most manufacturing contacts reported activity firmed
somewhat. Port activity continued to expand. Retailers reported that
sales grew on balance, and non-retail firms cited marginal revenue
expansion. Lending activity improved somewhat, although most
applications continued to be for refinancing. Residential real estate
activity continued to strengthen; however, areas of weakness remained in
the District. Tourism contacts reported healthy bookings as the summer
season ended. Commercial real estate reports were mixed for
private-sector projects and weaker for government-related projects.
Labor market reports were also mixed, with accounts of modest increases
in employment along with major layoffs and hiring freezes. Price changes
were generally small in the manufacturing and services sectors in recent
weeks.

Manufacturing. District manufacturing activity firmed somewhat
after having softened in earlier months. An auto supplier reported that
his firm’s sales continued to exceed expectations, which required
overtime and additional hiring. A manufacturer of wallboard indicated
that sales at his company rose, with the last few weeks being the
busiest this year. A manufacturer of residential door frames said that
demand in late summer was fairly flat, but he expected sales to improve
over the next six months. In contrast, a producer of electrical
components cited very weak business conditions, which resulted in layoff
announcements and plans to close the factory at the end of this year.
According to our latest survey, growth slowed in prices of both raw
materials and finished goods over the past month.

Activity at most District ports expanded over the last few months.
Port officials reported that both import and export activity
strengthened, although one official attributed some of the gain to
increased market share. According to another contact, the shipping
season peaked earlier than in past years, which may have been due to
manufacturers and retailers moving goods in advance of a threatened
labor disruption at East Coast ports. Nonetheless, imports were
bolstered by continued demand for commodities and components used by
manufacturers. One contact stated that exports to China of some
commodities and bulk goods were holding up better than expected. In
addition, exports of autos and heavy machinery to Europe remained
strong.

Retail. Retail sales reports from our contacts were mixed, with
modest improvement on balance. In Virginia, a grocer stated that
customer counts were up, but shoppers were spending less, while another
grocery contact commented that he will be opening several new stores by
early next year. A major building supply firm reported a significant
increase in the volume of wallboard sales; other inputs for major
renovation work also picked up. Several small retailers said that they
were preserving margins by reducing payrolls and cutting expenses.
However, collections on customer accounts have become a bigger problem,
according to one contact. Merchants remained somewhat guarded in their
outlook for spending during the holiday season. Small retailers were
conservative with inventories; they expected that their suppliers would
be flexible enough to make quick shipments if reorders should be needed.
To help push early purchases, several big-box retailers were advertising
a return of their lay-away programs, and other merchants started
offering lay-away for the first time. In addition, a number of internet
retailers were offering an online lay-away program. District automobile
sales varied, according to dealers. A contact at a large dealership
reported high foot traffic, observing that buyers gravitated to “the
deals,” such as substantial rebates. Retail prices rose at a somewhat
slower pace in recent weeks, according to our latest survey.

Services. Non-retail services providers reported slight gains
overall since our last report. Business activity strengthened for
professional, scientific, and technical services firms; a contact at a
Maryland telecommunications firm noted that demand was strong for
tech-related security services. However, there were also reports that
the possibility of government spending cuts associated with
sequestration caused firms to delay business decisions. One industry
executive commented, “We are hoarding cash.” Healthcare firms continued
to restructure to accommodate the post-reform environment in that
sector. According to a contact at a private healthcare group, that
organization had begun shifting away from low margin, basic services. A
Virginia airport executive noted that increased passenger traffic in
recent weeks had recovered from a drop earlier in the summer. Prices
moved up more slowly at services firms.

Finance. Lending activity improved marginally from weak levels
since our last report. One banker reported continued strength in
refinancing demand, which accounted for three out of four commercial
loan applications. A North Carolina banker noted that, while most home
mortgages were for refinancing, applications were fifty percent above
normal levels and over one third were for either purchasing or building
a home. Demand for commercial loans across the District was mixed,
according to several contacts, with modest improvements coming from the
medical, legal, and other services-related segments of the market. An
official at a large bank described consumer demand as remaining weak,
with the notable exception of auto loans, while business loans for
capital equipment improved slightly. Several bankers stated that credit
standards remained tight for consumer loans, but some easing had
occurred in order to capture attractive commercial loan applications. A
commercial banker said that uncertainty about whether a successful SBA
program would be renewed had curtailed his ability to get approval of
several viable small business loans.

-more-

** MNI Washington Bureau: 202-371-2121 **

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