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Beige Book Report: Atlanta

June 21, 1989

Overview
Firms headquartered in the Southeast continue to report business activity growing although many believe that it will slow. Reported upward revisions in capital spending plans by several manufacturers, indications of producers' expanding capacity, and strong export demand provide evidence of continued growth. At the same time, there are also reports of undesired accumulations of inventories in construction materials, agricultural supplies, paper materials, automobiles and retail goods at department stores. On the price front, our contacts are indicating generally stable prices for most producer inputs used in their operations. Labor costs are an exception; contacts say that nonwage benefits have been rising rapidly and report that localized shortages of skilled and non- skilled workers are generating some upward pressure on wages.

Reports of Business Activity
Most of our contacts indicate that while business activity is still growing, its pace is slowing. A few contacts, primarily in export related sectors, indicated a recent increase in demand and corresponding plans to expand output. Several manufacturers have reported that they have recently increased their capital spending plans. A chemical producer is restarting an idle plant, while a plastics manufacturer is planning to purchase new equipment to expand output. Several oil companies operating in the Gulf of Mexico note that capital spending has been more rapid than expected as the result of oil price increases. Sixteen mobile drilling rigs have recently been put back into operation. On the agricultural side, strong demand for poultry has prompted one producer to expand processing capacity by 50 percent. Financial institutions are reporting a slight weakening in overall consumer lending and credit reference firms report no unusual trends in consumer credit, except reductions in new auto loans.

The Inventory Picture
The overall inventory picture as painted by our contacts shows some moderation in economic activity resulting in unanticipated inventory building in some sectors while other sectors continue to experience substantial growth and inventory tightness. Undesired accumulation was reported in weaker sectors of the economy. A supplier of building materials notes that inventories are higher than desired, as does a producer of chemicals used in construction. Stocks of crushed rock have started to accumulate, and one producer has cut production hours 15 percent. Producers are reporting increased inventories of some chemicals and plastics. Agricultural supplies have been building up as some farmers delay or cancel plantings due to heavy rains in the Southeast. Several financial firms noted increased loan demand to finance higher inventories at some department stores but especially at auto dealers.

To balance the inventory picture somewhat, reports of desired accumulation and tightness were also received. A paper manufacturer reports a buildup of box inventories, but this was intentional in anticipation of increased demand later in the year. Several large retailers indicated that inventories are at desirable levels. A producer of telecommunication equipment reported less than desirable stocks in part because of increased export demand. Because of higher demand for electricity and strong export demand, coal stocks are below the level desired by producers.

Price Pressures
Southeastern contacts do not report strong concern about price pressures. In fact, they indicate that partly as a result of unintended inventory accumulation, some downward pressures could develop. A producer of chemicals and plastics reports that increasing supplies of primary chemicals are expected to cause price reductions later this year. He added that the demand for certain thermoplastics and polyvinylchloride compounds has eased recently because of slowdowns in construction. A plastic container manufacturer who had earlier expected to raise prices did not because of an improved supply of resins and corrugated packaging.

Paper prices have recently backed off from the increased levels established early in 1989, and one producer anticipates further cuts. Weakness in the price of linerboard was also reported, and one paper manufacturer reports that while demand is strong, it is weaker than expected earlier this year. And a producer of wood pulp noted that his firm's price is currently 10 percent higher than that of some European producers.

Those surveyed report scattered labor market shortages but do not regard generalized wage pressures as substantial. Wage increases are generally reported below 5 percent. The cost of employee benefits, however, has been rising more rapidly and many contacts report they have been trying to reduce nonwage compensation to control costs, in particular, medical coverages for employee dependents is being restricted.

One respondent indicated that wages for unskilled, outdoor labor in Nashville are often well above minimum wage levels. Entry level workers for hotels and restaurants are in short supply, and a large Atlanta retailer reports that entry level wages have been under constant pressure, although productivity increases have so far offset wage gains. The shortage of registered nurses continues, with wages rising faster than inflation. One banker in Atlanta has found it difficult to locate experienced managers and skilled clerical help. A producer of lumber and paper indicated that mandatory Sunday overtime is being eliminated and that the firm has seen no unusual pressure on wages.