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Beige Book Report: Atlanta

March 6, 2002

Sixth District contacts reported improved conditions in many sectors during January and early February, and most noted cautious optimism regarding the near-term outlook. The majority of retail contacts described sales as exceeding their expectations. Automobile sales did fall from the robust pace of past months, but inventory levels were mostly described as acceptable. Reports indicated positive signs from the manufacturing sector as orders and inventories were stabilizing. The defense industry, in particular, received a significant boost in new orders. Residential real estate markets maintained their strength, but contacts noted that weakness persisted in the District's office and industrial markets. The improving trend in the tourism and hospitality industry also continued, although hotel occupancies remained below those of a year ago. Bank lending activity was still sluggish, and remained supported primarily by robust mortgage refinancing. Price pressures were subdued overall. Several contacts noted rising health care, insurance, and security costs.

Consumer Spending
Reports from District retailers were upbeat in January. Most indicated that sales were above year-ago levels. There was some softening noted in early February, but most contacts indicated that recent sales had met or exceeded expectations. Apparel and home-related products were reported to have sold well. The majority of contacts anticipated that sales would rise moderately in the first half of the year compared with the same period last year. In contrast, District automobile sales were weak during January and the first part of February, as remaining incentive programs failed to significantly boost sales. Despite the softer conditions, no major imbalances were reported in automobile inventory levels.

Real Estate and Construction
Low mortgage rates continued to support strength in the District's single-family housing market, with contacts noting that the Florida market remained particularly robust. Most reports indicated that District home sales during January and early February were near the previous year's level. Home construction was described as near or slightly ahead of last year. Home inventories and new home construction was seen as balanced, although several contacts noted that Florida's housing inventory was low. Looking to the spring selling season, most contacts were cautiously optimistic.

District commercial real estate markets remained weak in January and early February. Office and industrial vacancy rates continued to run at high levels and prices were under downward pressure. The majority of new construction work is government-related or small build-to-suit projects.

Manufacturing
Reports on the District's manufacturing sector during January and early February were mixed, but generally suggested improved conditions. Alabama steel processors noted that conditions did not worsen in January and several District paper mills and lumber manufacturers reported maintaining employment levels. Orders for building products were described as picking up in some areas. The region's aerospace industry received a boost with new orders from defense contractors, and hiring for Nissan's new plant in Mississippi continues. On a less positive note, contacts reported a further contraction in the textile and apparel industry with a large plant closing in Mississippi and problems for some producers in Tennessee related to the Kmart situation.

Tourism and Business Travel
The hospitality and tourism industry in the District continued to recover through mid-February. Convention and conference bookings in Florida and Georgia were improving, although contacts noted that attendance at many events was subdued. Cruise lines out of Miami were sailing at near capacity levels and the use of deep discount pricing was less prevalent. South Florida hotel occupancy rates continued to be adversely affected by a dearth of international tourists. However, attendance at central Florida theme parks continued to improve, and reports on the President's Day weekend were upbeat.

Financial
Overall bank lending remained sluggish in January, but contacts noted that mortgage refinancing continued to be strong. Consumer loan volume at credit unions was also strong in some areas. The pace of investment bank activity was reported to have improved slightly, although direct commercial lending remained subdued. Contacts also noted that there was little new money entering the venture capital industry.

Wages and Prices
Labor market conditions remained weak in January and early February. Many businesses reported that they were willing to incur overtime costs in the short term rather than hire additional workers. Nonetheless, outplacement firms reported some improvement in activity, although it was noted that it was taking much longer for people to find employment than a year ago.

Prices were described as stable by most accounts. However, continuing increases in health care costs, security costs, and insurance was noted, and price discounting for rental cars and cruises were ending. Reports from the Gulf coast noted that high natural gas inventories and continued warm weather were keeping natural gas prices in check.

Agriculture
Citrus growers in Florida benefited from recent rains and colder temperatures, but the outbreak of citrus canker disease in prime Indian River tree areas could have a significant impact on Florida's citrus crop and on citrus prices.