WASHINGTON (MNI) – The following is the first of two parts of the
text of the Richmond section of the Federal Reserve’s Beige Book report
on current financial conditions released Wednesday:

Overview.

Business activity in the Fifth District was unchanged or slightly
improved in most sectors since our last assessment. In the service
sector, retail activity on balance remained soft during the last month,
while non-retail services firms reported flat or slightly increasing
demand. Tourism to mountain and ocean destinations picked up in recent
months. Banking activity improved moderately, but gains did not extend
to commercial real estate. Indeed, both commercial Realtors and
construction contractors reported that activity was little changed from
weak conditions in past months. In contrast, however, residential
Realtors indicated that low-to-medium priced homes across the District
were generally lifting the market, if only slightly, since our last
report. The manufacturing sector slowed over the last month, with
several contacts citing softer demand. Finally, employment agencies
specializing in temporary workers noted modest improvements in demand,
with several adding that recent uncertainty about the direction of sales
was causing their clients to postpone hiring full-time employees.

Manufacturing.

District manufacturing stalled in July after exhibiting moderate
gains in June. A producer of coated steel reported that orders had
declined during the entire second quarter. He noted that typically the
second and third quarters were the strongest for his company, but that
he was not seeing any improvement in either June or July. Similarly, a
furniture manufacturer indicated that business had slowed in recent
months, particularly for furniture collections for the home. Several
firms reported that working capital constraints, coupled with the
inability to pass through raw material increases, had limited their
ability to expand their business. In addition, a few contacts mentioned
that automotive deliveries had slowed and material costs had increased
recently as a result of the production interruptions in Japan. Our
latest manufacturing survey indicated that prices of both raw materials
and finished goods grew more slowly over the last month.

Fifth District ports continued to post moderate gains since our
last report. With shipping moving into its peak season, however, several
port authorities expressed concern that recent import gains were not as
strong as expected. One official attributed the apparent sluggishness in
May and June to retailers ordering earlier than normal last year (due to
uncertainty over shipping rates), making year-over-year comparisons
misleading. Another contact stated that the surge in trade that occurred
over the last year was not sustainable, and also added that the
weakening of the overall economy was affecting import volumes.

A shipping official noted that many businesses were reluctant to
build inventory and some retailers seemed to be holding back their
orders, adding to a sense of “choppiness” to shipping activity. However,
exports of coal and other commodities continued to do well, according to
a port official, and auto imports were described by one contact as
amazing, with automakers scrambling to rebuild depleted inventory.
Several contacts expected shipping activity to pick up later this year,
in part due to an increase in empty containers being shipped to
Asiapresumably to be refilled for the Christmas holiday season.

Retail.

Retailers across the District generally reported mixed sales since
our last report. A few retailers, for example, reported that mid-price
items languished in recent months, and customers bargained hard for
discounts. Several clothiers told us that their apparel sales
fellexcept in higher-end goods. In addition, rising cotton and wool
prices were pushing clothing prices higher. Our recent survey of
retailers indicated some weakening in revenues, although the weakness
was not as pronounced as a month earlier. However, several discount
stores reported increased shopper traffic and an uptick in total sales.
Grocery store contacts also reported rising sales, as did some wholesale
building supply firms in the D.C. area. Several luxury retailers
reported solid sales, and an auto dealer indicated strong sales in
recent weeks. One West Virginia dealer noted that foreign makes
continued to “outsell production.”

Services.

Service sector activity was flat to slightly stronger in recent
weeks. Revenues strengthened moderately, according to polled contacts,
particularly in telecommunications. A number of builders and
construction-related firms in the D.C. area also reported a pickup in
business during the past month. Most contacts we surveyed at restaurants
and hotels said revenues accelerated since the start of summer. However,
advertising agencies indicated that business was flat, and healthcare
services providers reported little change. Non-retail services
providers’ prices rose at a slightly quicker pace over the last month,
according to our recent survey.

Finance.

Loan demand in the District continued to improve, albeit at an
uneven pace, since our last report. Consumer lending increased in most
banking markets, according to contacts, with several bankers citing
examples of making loans for appliance replacements and home
renovations. A loan officer in West Virginia noted increased loans for
auto dealership inventory. And, a banker in North Carolina noted
continued strength in industrial loans for warehouse buildings and
machinery. However, another banker characterized industrial loans as
going more toward high-tech capital goods than traditional machinery.
Except for apartment buildings, commercial real estate loans declined in
most areas around the District, with several commercial developers
reporting continued difficulty getting financing.

One banker, however, cited a pickup in commercial loan demand
primarily from larger companies, while demand for small business loans
in general edged downward. Most bankers stated that intense competition
for quality loans was squeezing margins. Several contacts reported that
credit quality was flat or slightly improved over the last few months,
with the number of late payments edging down. A banker in Richmond said
that small businesses, especially retailers, accounted for most cases of
delinquencies.

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

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