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Beige Book Report: Atlanta

December 5, 1990

Overview
Most business contacts report that activity weakened in October and November from earlier this year, with real sales revenues even with or lower than at this time last year. Manufacturers producing for domestic consumption indicate declining orders relative to this time last year, and are cutting production and shrinking employment as a consequence. On a more positive note, orders for defense-related goods and exports are said to be increasing, thus supporting production and limiting the overall employment drop. Businesses report only limited cost pass-through of oil-related price increases and an easing of previous labor shortages for selected occupations. Retailers generally report poor sales; they are increasingly pessimistic concerning the outlook for the holiday season. Our business contacts almost universally note an erosion of consumer confidence. Reports from bankers mirror those of our manufacturing and retail contacts, indicating weaker consumer spending and more cautious borrowing behavior in October and early November than in previous months. In the construction sector, contacts report that the level of overall activity declined in October as compared to earlier this year or to last October.

Manufacturing
The consumer spending slowdown is said to be rippling through the manufacturing sector with widespread reports of declining orders and employee layoffs. As orders fall, apparel producers say they are attempting to reduce inventory risk by placing orders for fabrics only after they receive firm orders from retailers. A producer of children's clothing, who claims his sales are usually recession- proof, reports November orders are off by one-fourth compared to last year. Likewise, producers of shirts and hosiery report falling orders and continuing layoffs. A heavy equipment manufacturer reportedly will close a plant in November and more temporary shutdowns at auto assembly plants were announced this month.

Positive developments within manufacturing are noted by producers of defense products in Georgia and Alabama. An executive a: a major utility reported that energy use was up 5 percent on average in October from a year earlier in the metals, paper, chemicals, and auto parts industries. Except for metals, export markets for these products are reportedly strong.

Wages and Prices
Freight costs are being affected by higher oil prices, though transportation companies say the economic environment is limiting their attempts to fully pass-through fuel cost increases. The cost of producing petroleum-derivative commodities such as styrofoam packaging materials, chemicals, and fertilizers is also up and in varying degree is being passed on to customers. Utility company executives report that prices of domestically-produced alternative fuels such as coal and natural gas are remaining stable, limiting the impact of higher-priced oil. In labor markets, scattered reports indicate both an easing of the nurse shortage because the economic slowing is causing some local labor force reentry and growth in the pool of available skilled and professional workers. The recent call- up of reserves is reported to be having no significant impact yet on labor availability.

Retail Sales
Retailers and other business contacts generally used increasingly pessimistic terms to describe consumer spending. Most expect that real sales this holiday season will be down in Florida and Georgia, and only flat or up slightly elsewhere in the region relative to last year. Uncertainties about energy prices and the future of the economy are reported to continue their impact on consumer confidence and to limit buying of cars and other durable goods. In Florida, consumer confidence, as measured by a University of Florida survey, plummeted in October to the lowest level recorded in the survey's six year history. In Atlanta, a similar poll taken in mid-November by a private organization suggests holiday spending will be down this year compared to 1989. This poll also found that consumers are increasingly reluctant to make car or major appliance purchases as compared to sentiments expressed in August. Merchants elsewhere in the region also point to eroding consumer confidence and falling discretionary income as factors limiting consumer spending.

Retailers are generally comfortable with inventory and employment levels that are about even with those at this time last year. Some merchants are taking advantage of contract opportunities to reduce orders, particularly for durable goods.

Financial Services
Reports from bankers and other lenders across the region minor retailers' reports that consumer spending is slowing, with several contacts saying that consumer loan growth has weakened appreciably since summer. Lenders generally say they are even more concerned with deteriorating loan quality now than earlier this year. They indicate that weak economic growth, tighter regulatory scrutiny, and overbuilt real estate markets have caused them to apply credit standards more diligently to all types of lending.

Construction
Overall construction and absorption is reported to remain weak across the District. A contact in New Orleans says that real estate remains dormant there, and contacts in Atlanta say home sales are flat-to-down compared to last November. In Florida, a building materials producer reports that company sales in November were running 10-20 percent below expectations, and that a rebound is not expected in Florida until 1992. Florida and Georgia utility company executives note that monthly year-over-year rates of commercial and residential customer connections have been declining this year.