Beige Book Report: Atlanta
March 5, 2014
Sixth District business contacts described economic activity as expanding slowly in January and early February. Some weather related effects were noted for a few sectors late in the period. However, the outlook remains generally optimistic as most contacts expect near-term growth to be sustained at, or slightly above, current levels.
Overall, retailers cited sluggish sales growth for the beginning of the year. The District's tourism industry remained a bright spot with activity being bolstered by international visitors. Homebuilders and brokers noted home sales and prices were above year-ago levels for new and existing homes, while commercial real estate markets continued to witness steady improvements. Manufacturers reported increases in new orders and production. Reports from bankers suggested that loan demand increased for purchases but decreased for refinances. On balance, District employment gains were subdued and prices generally remained stable.
Consumer Spending and Tourism
Merchants reported a slow start to the year with sales growth declining. Many contacts noted that the drop in sales growth was partially attributed to the unusual winter weather experienced in parts of the region. Others indicated that increased healthcare premiums were having a negative impact. Sales for vehicles were lower than expected.
Hospitality contacts reported an increase in business and convention bookings. Reports also indicated that the favorable U.S. dollar exchange rate was a contributing factor to a rise in international visitors. However, contacts did convey that some of the region affected by the unusual winter weather in January and February experienced losses in revenue due to closures of attractions and restaurants, although most hotels were not as adversely affected. Hoteliers still expect only slight growth in occupancy rates for the first quarter of 2014 compared to the same period last year, while room rates and revenue per available room are expected to grow more robustly.
Real Estate and Construction
District brokers indicated that growth in existing home sales had picked up modestly in recent months. Most brokers said sales were slightly up compared with a year earlier and more contacts noted that sales activity was in line with their plan for the period. By most accounts, inventory levels had fallen on a year-over-year basis. The majority of contacts reported that home prices remained ahead of the year earlier level but that price gains have slowed on a month-over-month basis. The outlook among residential brokers continued to improve since our last report.
Reports from District builders were more positive than previous reports. Most contacts agreed that recent activity was in line with their plan for the period. The majority of builders reported that construction activity and new home sales were ahead of the year earlier level, although most reports indicated that unsold inventory levels had remained unchanged from a year ago. The majority of contacts also reported modest home price appreciation. The outlook for new home sales and construction activity remained positive, although many builders expressed concern about dwindling lot inventories and their inability to secure the financing needed to develop new lots.
District brokers noted that demand for commercial real estate continued to improve. Absorption was picking up, although contacts cautioned that the rate of improvement still varied by metropolitan area, submarket, and property type. Construction activity continued to increase at a modest pace from last year; most contacts reported that their backlog was ahead of year earlier levels. Looking ahead, contacts expect that construction activity in apartments will continue to be somewhat strong in 2014 and that there will be a modest increase in construction activity across other property types. The outlook among District commercial real estate contacts remained positive with further improvements expected over the course of the year.
Manufacturing and Transportation
Manufacturing contacts in the region cited expanding activity from January through mid-February, but the pace of growth was moderate. Contacts reported improvements in new orders and production. However, a number of contacts stated that the unusual winter weather affected production in late January and output was lower than planned for that month. That said, nearly two-thirds of purchasing managers polled expect production levels to be higher over the next three to six months.
District transportation firms reported mixed results. Air cargo contacts cited nearly double-digit declines in overall tonnage from a year ago. Port contacts reported year-over-year volume increases in container traffic, bulk cargo, and automotive and machinery. Total rail carloads were down slightly over the same period last year; however, intermodal volumes continued to experience modest gains.
Banking and Finance
Banking and credit union contacts expressed mixed concern about the implementation of the new Qualified Mortgage Rules. Some community bankers reported that they have exited the residential mortgage business altogether because of increased regulatory burdens, while others indicated that they do not believe it will have a negative effect on overall mortgage lending. A number of lenders reported increases in purchase mortgages, but not enough to offset the declines in refinances. Regional credit unions were reportedly offering highly competitive rates on CDs to attract deposits in order to sustain lending activity.
Employment and Prices
Since the last report, job growth remained muted across the District. Contacts in construction, manufacturing, energy, hospitality, and real estate noted modest growth in employment. Trucking companies continued to cite driver shortages even amidst rising pay. Rather than adding to payrolls, businesses reportedly continued to rely on technology to enhance output. Some employers continued to show reluctance in large-scale hiring due to concerns about healthcare reform.
Most contacts reported modest and relatively stable labor and material cost pressures. Construction industry contacts remained a notable exception, indicating strong upward pressure on labor costs and some materials prices. According to the Atlanta Fed's February business inflation expectations (BIE) survey, costs were up 1.7 percent from a year ago and were expected to pick up slightly to 2.0 percent over the coming 12 months. In general, businesses continued to indicate that they had little to no pricing power.
Natural Resources and Agriculture
Strong production growth coupled with higher pipeline capacity continued to supply Gulf Coast refiners with ample light sweet crude. Natural gas storage levels were reported as notably low due to increased withdrawals that were exacerbated by the unusually severe weather. Commercial and residential demand for utilities increased significantly as a result of the weather, yet industrial usage remained fairly consistent with seasonal norms. The energy industry remains optimistic regarding their outlook for demand, pricing, and productivity.
Recent rains improved soil conditions in parts of Florida and Georgia while portions of Alabama, Louisiana, Mississippi, and Tennessee experienced dry soil conditions. Meanwhile, freezing temperatures and cold winds had farmers and livestock producers taking precautions to mitigate damage to crops and livestock throughout much of the District. There were mixed reports of the impact on Florida crops with some indicating damage to vegetable and strawberry crops and others suggesting no damage to citrus. However, the Florida citrus crop continues to be adversely affected by citrus greening causing diminished production and increased expense battling the disease. On a year-over-year basis, prices paid to farmers for corn, soybeans, hogs, and broilers were down; while cotton, rice, oranges, beef, and eggs were up. The most recent domestic crop production forecasts for corn, rice, soybeans, oranges, and cotton were unchanged from a month ago. Similarly, pork and broilers projections were down moderately while beef projections were up slightly.