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Beige Book Report: Atlanta

January 24, 1990

Overview
Contacts in the Southeast indicate that economic activity continues to expand sluggishly. Reports of weakness for industries producing goods related to residential and commercial construction and autos were widespread. Makers of industrial machinery and construction equipment have reported scaled-down capital spending plans. At the same time, chemical, paper, apparel, and natural gas producers report some increase in capital spending, much of it going to upgrade equipment. Retailers noted modest gains in the dollar value of holiday sales over last year, although they indicated that price- discounting and heavy advertising had reduced profit margins. Commercial lending continues to slow; consumers are said to be more cautious in taking on new debt. Skilled workers are still in short supply in a few locations. Wage increases are reported as being in line with expectations while input prices were said to be soft with the exception of fuels.

Prices, Wages and Employment
Most employers continue to report that wage increases are about the same as earlier in 1989. Few labor shortages were noted, although there is scattered tightness in the supply of skilled workers. Contacts in transportation and utilities said that they are still having some trouble attracting mechanics and skilled craft workers. However, a Florida contractor pointed out that the slowdown in construction there had eased markets for unskilled and skilled workers. Manufacturers of tires and auto components have recently announced that they will be laying off workers because of falling auto production.

Prices of raw materials are said to be soft with the exception of fuel. A plastics producer says he expects the prices of bulk chemicals and resins to continue falling. Metal prices are reported to be stable or, in the case of aluminum, falling slowly. A builder reports that the prices of construction materials are generally softer than last year. Airlines, trucking firms and energy producers have noted sharply higher fuel prices, although some felt that the increases were the result of the recent cold snap and therefore, temporary.

Retail Sales
Most retailers reported that nominal sales in December showed modest gains over last year. Widespread price-cutting across the District reportedly increased the volume of sales but also cut into profits. Sales of furniture and home appliances were reported weaker than a year ago, while sales of women's apparel were notably stronger. Most retailers said that inventories after the holidays were at planned levels.

Southeastern auto dealers continue to report that unit sales are down between 10 and 50 percent compared to last year. Several noted that the greater use of five year loans to finance cars in recent years has cut into current demand, especially for smaller models. They believe that lengthened maturity of these loans has not allowed car owners to build up enough equity to trade in for a new model. Other dealers pointed out that consumers have become accustomed to rebates and are much more price conscious than in the past.

Construction and Capital Spending
Reports on residential construction indicate the general weakness in this sector in the region continues. In parts of Miami, however, the demand for expensive homes is holding up as second and third time buyers cash in on past appreciation to purchase larger homes. Several contacts are now reporting increasing office vacancy rates in Florida. Warehouse construction shows some strength in Miami, although some contacts indicate this market may soon be overbuilt. Pre-leasing rates for a number of new projects that have recently gotten underway in downtown Atlanta are lower than was usual in the past.

Industrial construction along the Gulf coast continues to expand. Several large natural gas processing plants are reportedly planned for the Mobile area; and several others are expanding capacity. Several contacts noted an increase in the number of active drilling rigs in the Gulf, and they believe that the increase is permanent.

Some manufacturers of apparel, paper, and heating equipment report that they are installing computerized inventory control systems, which they expect to smooth production runs and control costs. New or expanded health care facilities have been announced in northern Florida and in Birmingham, Alabama. Several producers of heavy machinery and construction equipment report that they scaled back capital spending in 1989 and have planned no capital expansion for 1990.

Financial Services
Bankers noted an increase in business loans in December after several months of decline. They point out, however, that much of the lending has been to finance inventories and refinance older loans rather than to finance plant or capacity expansion.

Many lenders reported slower mortgage growth than at this time a year ago. Single family mortgage delinquencies are also increasing according to several bankers. In spite of lower mortgage rates, they do not expect much rebound in extensions in the next several months.

Commercial real estate loans were also down across the District. Contacts reported lenders' pre-lease requirements for new office projects have increased during the year.