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Beige Book Report: Atlanta

August 10, 1983

Recovery continues to gain momentum in most of the Southeast. Deposits and loans at large financial institutions increased in the early summer, and the improved climate is stimulating innovations and expansion of services. Manufacturers in housing-related industries are operating at substantia1ly increased levels of capacity. The resurgence in construction is helping to buoy consumer spending as well. However, spokesmen for the construction industry, as well as some realtors and manufacturers, are apprehensive that recent increases in mortgage rates may curtail the current, brisk pace of growth. Strength in the tourist industry remains concentrated in Florida and Georgia. Adverse weather presages declining crop revenues in the troubled agricultural sector.

Employment and Industry
Comments from industry representatives reinforce the strength shown by the latest labor market statistics. The southeastern unemployment rate in June dropped to single-digit levels for the first time in eight months. Respondents indicate that the upturn in housing and auto sales has boosted production in the textile industry. Georgia mills are now running at about 80 percent of capacity, the highest utilization rate in 30 months. For the first time in three years some Georgia carpet manufacturers are concerned about production keeping pace with demand: a recent uptick in the price of carpet yarn suggests acceleration of demand growth. North Georgia carpet mills produce about 60 percent of American-made carpets.

Southeastern corporations producing timber-related products are registering marked increases in activity; they are approaching full productive capacity and 95 percent employment levels. However, industry contacts are concerned about the possible negative effects of the recent rise in mortgage rates. Louisiana's petrochemical industry is beginning to experience a general increase in orders, but firms are not yet recalling workers.

Consumer Spending
Consumer spending is maintaining the strong performance reported earlier this summer. June taxable sales in the District rose 12.8 percent from 1982 level. Increases of over 20 percent in Florida and Georgia outweighed decreases in Louisiana and Tennessee. Some retailers report increases in June of up to 40 percent over their 1982 levels. Most merchants polled expect sales figures for July to be lower than in June, but they confidently anticipate back-to- school sales in August will prove strong. June was the best month yet in 1983 for new motor vehicle sales in the Southeast. Georgia led the District in sales. Not only durables and home furnishings but also apparel and personal luxury items are moving well in most localities. Merchants expect these increases to continue as the improved housing market and heightened consumer optimism stimulate new purchases. Retailers report little effect from the July 1 tax cut except that it augmented consumer confidence. A number of retailers point to the increased use of credit as an indicator of growing consumer confidence in the economic recovery.

Construction
A month-long increase in mortgage rates during July has raised fears that the pace of recovery in the housing industry may decelerate. As of August 1, FHA/VA interest rates for 30-year, fixed-rate mortgages increased by a full percentage point to 13.5 percent. Because FHA/VA mortgage rates are determined at closing, some home buyers will not be able to close loans for which they applied up to nine to twelve weeks ago when rates were 11.3 to 12.5 percent. The industry's near-term outlook for mortgage rates is mixed. Some lenders feel that rates are now plateauing and will decline later in the year, but others believe that federal deficits will continue to compete for funds and will keep mortgage rates high. Although the rise in mortgage rates should reduce required discount points, the higher rates will raise minimum income levels required to qualify for loans and thereby eliminate some buyers. Realtors expect the rise in FHA/VA rates to reduce sales by 5 to 8 percent.

According to real estate agents polled, residential sales remained vigorous through July although sales were not quite as strong as in May and June. Building permit activity continued an upward trend through June. Single-family permits in the District rose by 2.2 percent. Contacts indicate that building permits were holding up well through July. In some areas single-family permits issued were running 50 percent ahead of year-to-date figures for last year. The commercial real estate sector is finally gathering some momentum. Leasing companies report that office vacancy rates are dropping throughout the Southeast They attribute this increased activity to a "recovery psychology." Reportedly, many managers believe the recession is over and are leasing new offices before increased demand begins to put upward pressure on leasing prices.

Financial Services
Both thrifts and commercial banks added to their deposit bases in June. With the exception of business loans, which backed off slightly from their May levels, loan demand at large District banks continued strong in June. Southeastern bank earnings, at several Florida institutions in particular, improved in the first half of 1983 because of the declining cost of funds and growing loan activity. The improved business climate seems to be encouraging regional banks to introduce innovations and expansion of services, such as discount securities brokerages and statewide automated teller networks.

Tourism
The travel industry is faring best in Florida and Georgia. Conditions have changed little since June except for an apparent slowing of the "boom" in central Florida. Although the most popular attraction is doing well, its margin of growth relative to last year is less now than in the winter and spring, and occupancy rates at central Florida hotels have dipped somewhat from near capacity levels earlier this year. Other attractions, particularly in south Florida, report that attendance is flat or off from 1982 levels. Miami's cruise ship industry is suffering from overbuilding and price cutting; some lines are offering 50 percent discounts on fares. However, expansion and refurbishing continue in anticipation of continuing growth in certain younger markets.

Pass-through traffic into Florida is contributing to the strong performance of Georgia's tourism industry. The Georgia Hotel/Motel Association reports that hotel occupancy along interstate routes is quite healthy. Convention business in Atlanta's central business districts has been off 10 percent during the first six months; however, this drop-off may be more a lagged effect of earlier crime problems than of recent economic trends. Overall attendance at Georgia attractions is, more than, 18 percent over last June. In other southeastern states, summer tourist business has been off. June 1odgings tax receipts in Mississippi, Louisiana, and Tennessee were below year-ago levels. Attendance at a number of Tennessee attractions also is below last year's levels, and at some it is below even 1981 levels. Travelers to Tennessee's largely middle-income tourist market are reportedly quite cost-conscious.

Agriculture
Recent hot and dry weather throughout most of the Sixth District is having a severe impact on crops, especially corn, soybeans and cotton. Soybeans face the greatest potential loss because plantings occurred later than usual, and crops lacked sufficient maturity to withstand prolonged dry conditions. Weather seems to have had the least effect on corn in southernmost parts of the District because crops there are near maturity. Reliable estimates of yield losses are not yet available, but preliminary figures suggest a decline of up to 10 percent on average and a concomitant 15-25 percent drop in net farm revenue. Reduced acreage, unfavorable weather conditions, and plant diseases augur a near 40 percent reduction in revenue for the District's 1983 tobacco crop.