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

FIFTH DISTRICT – RICHMOND

Overview. Business conditions in the Fifth District were either
weak or weakening in most sectors since our last report. Manufacturing
activity contracted moderately in September, after pulling back markedly
in August. Retail sales also softened. In addition, activity at
non-retail services firms began to decline. Both residential and
commercial real estate activity remained near the weak levels seen in
recent months. However, in banking, a moderate improvement in commercial
lending offset weakness in mortgage lending. Tourism remained strong
overall. District labor markets had undertones of weakness, with temp
services reporting problems finding qualified workers. Price pressures
moderated since our last assessment.

Manufacturing

District manufacturing activity continued to contract in September.
A primary metals producer reported a dramatic falloff in their domestic
orders, noting that a domestic retail chain had recently cancelled a
large order. The firm expects to cut production unless orders improve
immediately. Similarly, several textile and apparel manufacturers
indicated that customers had reduced their purchases. Moreover, a number
of furniture producers cited sluggish consumer spending, but added that
corporate spending had improved somewhat since our last report. In
contrast, an automotive parts maker said that underlying business was
very strong. Also, a metal fabricator cited examples of improving
orders, with autos and aerospace among his strongest customers. Our
latest manufacturing survey showed that raw material prices grew at a
considerably slower pace, while prices for finished goods changed little
since our last report.

Port activity has advanced at a slower-than-expected pace in recent
months. Several analysts stated that exports continued to outpace
imports, but characterized both as somewhat soft during the current peak
season. An official noted that major retailers were not anxious to build
inventory going into the big holiday season and were waiting for an
improvement in consumer spending before increasing their import orders.
Another port official reported that ocean carriers had also become less
optimistic about cargo shipments over the remainder of the year. Auto
exports were flat in recent months, according to one analyst, but auto
imports were starting to increase as dealers began stocking for the new
model year. Exports of coal and other commodities continued to do
exceptionally well.

Retail

Retail sales generally weakened since our last report, although
several merchants reported a pickup in the last week of September. Most
contacts indicated that back-to-school sales were satisfactory, but for
many, somewhat below expectations; a Virginia retailer commented that
sales were good, though not fantastic. Shopper traffic waned in early
September but returned later in the month. A retail contact in central
Virginia reported that credit-card use increased toward the end of the
back-toschool season, indicating shoppers were more confident, but
remarked, if consumers accumulate sizeable levels of debt now, they
might spend less during the holiday season. An executive at a Virginia
hardware chain also reported strong sales through September, with little
difficulty passing through price increases. Looking ahead to holiday
sales, a Maryland department store manager was cautiously optimistic and
she expected practical gift-giving this year. Apprehension about the
strength of holiday sales has constrained seasonal hiring for some
retailers. Small merchants in some areas reported difficulty obtaining
financing for inventory. Big-ticket sales continued to be soft overall,
but automobile sales were steady since our last report, according to
several contacts. A West Virginia auto dealer said that his sales were
close to 2010 levels, while a dealer near the D.C. metro area reported a
stronger month, led by imports. Average retail wages and prices
increased moderately, according to our contacts.

Services

Non-retail services providers reported slower activity. A number of
services providers complained about various new government regulations
and regulatory burdens on their businesses. Contacts on the southern
Delmarva Peninsula expressed anxiety that new EPA regulations for the
Chesapeake Bay could result in local chicken farmers losing contracts to
farmers further inland, resulting in trickle-down business closures and
job losses. Several executives commented that they were refraining from
expansion and hiring and that they were holding cash because of
uncertainty about the economy. An executive from a West Virginia
engineering firm commented, We are now in a wait-and-see mode.
According to a transportation contact, freight trucking firms faced
challenges in hiring long-haul drivers, as drivers opted to remain on
unemployment benefits rather than accept higher income for driving
longdistance routes. Prices at services firms climbed more slowly since
our last report.

Finance

Lending activity in the District was mixed over the last six weeks.
Several commercial bankers in Virginia and Maryland reported moderate
increases in loan demand in recent weeks, although some of the increase
was from refinancing. One banker attributed an increase in loan
applications to businesses shopping around to establish new bank
relationships. Also, a lending officer in Richmond reported a sharp
increase in loans to existing customers, because new products were now
available and the approval process was faster. However, several bankers
in West Virginia and the Carolinas noted a recent slowdown in home
mortgage lending, following signs of improvement as recently as July. An
exception was home refinancing, which benefited from lower mortgage
rates, according to several sources. One commercial and industrial loan
officer stated that the recent rise in economic uncertainty had caused
several of his clients to pay down debt. Another banker reported that
local auto dealers were borrowing less now, but were expected to
increase their borrowing for new model year deliveries. Most banks
continued to report improvements in credit quality, partly due to
tighter credit standards. However, that tightening also contributed to a
slowdown of the approval process.

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

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