Beige Book Report: Atlanta
April 16, 2014
On balance, the Sixth District economy expanded at a modest pace from mid-February through March. Reports across sectors were optimistic and most business contacts expect near-term activity to grow at a moderate pace.
Retailers cited a slight pickup in activity after experiencing sluggish sales at the beginning of the year. Hospitality contacts in areas negatively impacted by the adverse winter weather saw improvements in activity. Home sales were mixed but prices continued to appreciate from a year ago, according to residential homebuilders and brokers. Commercial real estate activity improved with construction growing at a modest pace from last year. Manufacturers reported continued improvements in new orders and production. Bankers noted an increase in loan demand. Hiring remained restrained for all sectors except construction. Prices increased slightly but most firms continued to report having little pricing power.
Consumer Spending and Tourism
District merchants reported an uptick in activity from mid-February through March following sluggish sales in January, which were widely attributed to the severe winter weather. Valentine's Day provided a boost to activity with some contacts reporting double-digit, year-over-year, sales growth. Retailers continued to express concerns regarding the potential impact from increased healthcare premiums on consumer discretionary income. Light motor vehicle sales grew modestly over the time period.
Overall, District hospitality contacts reported positive activity after experiencing a decline in January as a result of the adverse weather conditions. However, negative impacts on the number of travelers to the District due to international political issues, especially on Latin America visitors, were a concern among many tourism contacts. The outlook for the next six months remains optimistic with most expecting an increase in business and leisure travel compared with a year ago.
Real Estate and Construction
District brokers' reports were slightly less positive than in previous reports. Brokers reported home sales were mixed. In areas where sales growth had slowed, brokers largely attributed the softness to higher home prices, limited inventory, and higher mortgage rates. Inventory levels continued to fall on a year-over-year basis and the majority of contacts reported that home prices remained ahead of the year earlier level. The sales outlook among brokers was somewhat weaker since our last report, although most contacts indicated that they expect the recent softness to be temporary.
Reports from District builders were slightly less positive than earlier reports. Fewer contacts indicated that recent activity was in line with their plan for the period. However, the majority of builders reported that construction activity and new home sales were ahead of the year earlier level. Most reports indicated that the level of unsold inventory had fallen from a year ago. The majority of contacts continued to report modest home price appreciation. The outlook among builders for sales and construction activity remains positive.
District brokers noted that demand for commercial real estate continued to improve. Absorption picked up, although contacts indicated 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 current backlog was ahead of year earlier levels. Commercial contractors indicated that apartment construction remains fairly strong; however, some shared concerns that construction activity may be getting overheated in a few markets. Contacts reported that construction activity across other property types increased modestly. The outlook among District commercial real estate contacts remained positive with continued improvement expected over the course of the year.
Manufacturing and Transportation
Manufacturers reported increased activity across the region from mid-February through March. Significant improvements were cited in production and new orders. Weather conditions hampered activity, but the impact was not as severe as earlier this year. Finished inventory levels rose while purchasing agents reported longer wait times for supply deliveries and higher commodity prices. Nearly half of purchasing managers polled expect production levels to be higher over the next three to six months.
District transportation contacts widely reported an expansion of activity since the last report. Port contacts were especially upbeat, citing a rise in energy exports, increased shipments of bulk agricultural commodities, and record container volumes. Significant capital expenditures for port property expansion, infrastructure, and tenant activity were noted. District trucking contacts reported strong freight volumes, along with notable increases in tonnage following a significant decline in January due to the weather. Railroads continued to cite modest gains in intermodal traffic, led by container volume. Total rail carloads remained flat as significant increases in shipments of grain, petroleum, and metallic ore were offset by double-digit declines in the movement of farm products, phosphate rock, and coke.
Banking and Finance
Since the last report, some banking contacts indicated a loosening of credit as a result of increased competition. Community bankers reported improved loan demand with aggressive loan terms and pricing driven by competition from larger banks and other community banks. Commercial loans were primarily fueled by poaching transactions from other banks rather than new business formation though District bankers noted a healthy pipeline for new loans related to commercial real estate. Credit line usage fell at some banks and small business clients remained hesitant about new borrowing. Banking contacts indicated their cost of doing business was going up as compliance costs increased.
Employment and Prices
District payroll growth remained constrained from mid-February through March. Firms continued to show a preference for implementing technology to increase output as opposed to adding staff. However, hiring increased in the construction sector across most of the District. Trucking companies continued to note difficulty finding drivers. Some employers continued to show hesitance in hiring on a large scale due to concerns surrounding healthcare reform.
Contacts continued to indicate little wage pressure outside of some high-skilled positions. With regard to the Affordable Care Act, most large companies expressed little concern about the law; however, some small and service-oriented businesses noted that health benefits costs had risen significantly and more eligible employees elected coverage. Non-labor input costs increased very slowly, with a few noted exceptions, including rising costs for developed land, construction materials, and food. Unit costs are expected to increase 1.8 percent over the next year, according to the Atlanta Fed's survey of business inflation expectations. Profit margins remained tight across most industries, as contacts continued to report very little pricing power.
Natural Resources and Agriculture
Contacts reported that harsh winter weather exposed limitations in U.S. natural gas distribution infrastructure. Demand was high and there was ample supply, yet transportation and distribution of gas was limited by the weather. In order to meet demand, power plants that typically operate with natural gas were forced to revert to coal. Over the fall and winter, utility companies in the region experienced growth in their residential customer base and attributed this to household formation and migration. The outlook among energy contacts remains optimistic for the year.
While sufficient rainfall left only small pockets of dry conditions in the District, some growers reported delaying spring planting due to too much precipitation. Florida's citrus growers continued to seek ways to mitigate the effects of citrus greening and contacts were hopeful that new research funding included in the recently approved Farm Bill would help find a solution to this problem.