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Beige Book Report: Atlanta

May 8, 1984

The pace of economic growth is slowing in the Southeast. Labor markets continue to strengthen largely because of ongoing expansion in the industrial sector. However, most manufacturers, fearful that the recovery is near its peak, are not initiating plant expansions and are monitoring inventories carefully. Growth in consumer spending has decelerated, but retailers are satisfied with current inventory levels. Rising interest rates contributed to a decline in residential construction in the early spring, but commercial building remains on the rise. Consumer and mortgage lending has slackened. Even the growth rate of business lending, which was strong throughout the first quarter, fell in April. Southeastern thrifts are avoiding sharply discounted adjustable-rate mortgages. Conditions in the travel industry are healthy despite rapid expansion of lodging facilities and the lingering effects of intense airfare competition last year. Pork supplies should not fall as drastically in the Southeast as in the nation, and the outlook for profitability in this segment of the agricultural sector is positive.

Employment and Industry
The unemployment rate in March fell on a seasonally adjusted basis in five District states. Defense contracts, tourism, and construction are boosting employment in Florida. Florida's 5.5 percent jobless rate was the lowest in nearly a decade. Manufacturing is sustaining much of the employment growth rates of recent months. Steel and aluminum production in Alabama recently increased. The forest products industry is operating near capacity, according to a trade association spokesman. Recent unfavorable weather conditions have hampered some timber harvesting, causing mills to struggle to meet surging demand. However, lumber industry representatives are concerned about the effect of rising interest rates on demand for wood products. Strong backlogs reported by contacts with oil surveying crews and seismic operations in Louisiana portend renewed drilling activity.

Contacts in most industries stress that greater utilization of present facilities is a top priority; plant expansions are infrequent at this time. Many producers, fearing that the recent surge in economic growth cannot be sustained, are maintaining a close watch over inventories. The strong dollar and slow recovery abroad are retarding the growth of manufactured exports from Miami to Latin America and of grain and coal exports from New Orleans and thereby limiting the recovery foreign trade activity in the District. Port officials throughout the region foresee a continuation of slow export growth.

Consumer Spending
District retailers report a slowdown in March-April sales growth from the year-over-year advance recorded in the January-February period. Easter holiday sales were below merchants' expectations, but they were above 1983 levels. Electronics, home furnishings, cosmetics, shoes, and sportswear were among the top selling items this Easter. Retailers also report that there have been no significant increases in suppliers' prices and inventories generally are at desired levels. The monthly growth rate of car sales in the region remained strong in the first four months of 1984 but, in contrast to the 1983 pattern, has fallen below the national rate. Compact and medium-sized models are showing particularly healthy sales growth here.

Construction
Contacts in major District cities report decreases in single- and multifamily building permits from March to April following increases from February to March. Orlando, with 26 percent and 52 percent decreases in single- and multifamily building permits, respectively, experienced the greatest slowdown from March to April. Most respondents attribute the decline to rising interest rates and rainy April weather. The Federal National Mortgage Corporation is discouraging sharply discounted adjustable-rate mortgages (ARMs), and some private mortgage issuers have become reluctant to insure such ARMs. As financial institutions respond to this trend, higher income requirements for ARMs may be shrinking the pool of potential home buyers.

Nonresidential construction, measured in square feet, increased 57 percent from February to March, surpassing the national rise of 39 percent. Overbuilding is a concern in Atlanta's office market. Fears of further materials price rises and interest rate escalation have caused builders in Orlando to decrease speculative building and purchase forward commitments to guarantee current rates. Population growth and corporate relocations are also fostering development, but increased building costs and rising interest rates have spurred builders in some areas to rush projects in progress in case the boon should end soon.

Financial Services
Loan demand at banks has been strong through the first quarter. Business and real estate lending has grown most rapidly, although business lending slowed somewhat in early April. Consumer lending softened in the March-April period. Deposits, especially demand deposits, at large commercial banks declined in March. Contacts believe withdrawals for income tax payments caused the shrinkage. Savings and loan associations in Louisiana and Mississippi registered large increases in mortgage commitments, but higher mortgage interest rates dampened this activity somewhat in April. A poll of southeastern savings and loan associations revealed little usage of deep-discount (5-7 percent range) adjustable-rate mortgages. S&Ls have taken steps such as raising minimum income requirements to protect themselves from the heightened risk of such loans.

Regional interstate banking is gaining legislative momentum in the Southeast. Georgia has enacted a law permitting interstate banking, and Florida, South Carolina, and North Carolina have bills at varying stages of the legislative process. Meanwhile, banks outside the Southeast are taking advantage of a provision in federal banking statutes allowing out-of-state banks to operate consumer loan and deposit-taking facilities provided they refrain from offering either business loans or checking accounts. Over 30 institutions have applied to operate these consumer banks in Florida and Georgia.

Tourism
Most sectors of the tourism industry posted increases at the beginning of the spring season. Visitor center registrations were generally up in March, although the rate of growth in Florida was a narrow 2 percent, a reflection of both a deceleration in visitor growth and a later Easter. Respondents report that convention business is healthy, especially in Nashville and Orlando. Losing tax revenues showed a double-digit percent increase over year-earlier levels in every state. Hotel occupancy rates, however, have softened from last year because of the large number of new rooms available. The 1984 World's Fair in New Orleans should help hotels in Louisiana, Mississippi, and Alabama. Reservations managers report strong bookings through the spring. Advance ticket sales to the Fair had been below expectations but have spurted in recent weeks.

Air traffic continued to rise in most smaller cities in March, but the Atlanta and Miami airports reported a drop in passenger volume of 2 percent and 3 percent, respectively. These declines reflect the elimination of sharply discounted fares, which inflated air travel a year ago. Cruise ship bookings are still slow but on the rise. Anticipating growth, several lines have launched new luxury ships from Florida ports.

Agriculture
In response to rising feed costs, pork farmers began to reduce inventories last year by marketing hogs earlier and breeding fewer sows. A recent survey suggests that reductions are continuing and this summer's farrowings at the national level will be the lowest since 1975. However, partial data for the Southeast imply that inventories here will remain at approximately 90 percent of 1983 levels. If normal crops are produced in 1984, feeding costs should decline in the fourth quarter and hog prices should rise, prompting an increase in production that will reach the consumer next year. Declining costs and rising revenues should improve the profits of pork producers. The pork industry generates over $800 million in annual farm revenue in the Sixth District.