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Beige Book Report: Atlanta
May 30, 2018
Summary of Economic Activity
Sixth District business contacts reported that economic activity continued at a modest pace from April through mid-May. The outlook among contacts remains optimistic with most firms expecting modest growth to continue over the next three to six months. District firms still report difficulties finding candidates across a broad range of industries and skills, and reports of wage pressure varied widely based on geography and job type. Most nonlabor input cost pressures were subdued; however, there were reports of rising steel and aluminum prices as a result of the new tariffs. On balance, District merchants reported a slight increase in sales levels since the previous report, and auto dealers noted light trucks sales were solid. The tourism sector continued to note positive activity. According to residential real estate contacts, home sales were mixed and prices continued to modestly appreciate compared with a year ago. Builders reported that new home construction increased since the previous report. Commercial real estate contacts indicated that demand continued to improve. Manufacturing purchasing managers cited increases in new orders and production.
Employment and Wages
Business contacts continued to report a tightening labor market across some geographies, industries, and skill sets. Finding and retaining hospitality workers, long-haul drivers, technicians, skilled craft laborers, distribution workers, nurses and other medical staff, and information technology professionals was especially difficult. Contacts also noted that geographic mobility was a major challenge, as workers' willingness to relocate for a position remained more challenging than in the past. Overall, contacts expressed that recruiting and retention efforts were much more aggressive and creative than they were a year ago. Firms also continued to boost training efforts and programs for existing employees and less experienced employees, to expand partnerships with workforce development entities and community colleges, and to broaden their geographical search for candidates.
On average, annual wage increases remained in the two to four percent range. The intensity of wage pressure varied greatly across the region. Firms reporting mild pressure typically responded by offering nondirect wage benefits, like increased vacation time, flexible scheduling, and marketing a positive culture to both existing and potential workers. In cases where wage pressures were described as "acute," if firms were still not able to meet demand with their existing labor supply after implementing nonwage benefits, they typically raised wages, often considerably.
Overall, contacts reported that input costs were mostly flat with some reporting limited pricing power. However, most manufacturing contacts reported increases in input costs, particularly for steel, aluminum, and transportation. Some companies reported the ability to pass along these commodity input cost increases due to expectations of rising costs related to tariffs. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.9 percent in May. Looking ahead, survey respondents indicated that they expect unit costs to rise 2.0 percent over the next twelve months.
Consumer Spending and Tourism
On balance, District retail contacts reported a slight pick-up in sales levels since the last report. Retailers expect modest increases in spending over the summer months. Sales of light trucks continue to remain strong according to auto dealers.
Tourism and hospitality contacts across the District reported growth in the number of visitors and activity in April compared to a year ago. Expectations among most contacts are for a strong summer season in leisure and business travel.
Construction and Real Estate
Reports from District residential real estate contacts signaled modest but continued growth. Builders reported construction activity in May was slightly up compared to one year earlier. Builders indicated that home sales and traffic were flat to up slightly from the year-ago level; while broker reports were mixed. Most builders said inventory levels remained unchanged from one year ago; while brokers noted that inventory levels were down. The majority of builders and brokers continued to report home price increases in May. Southeast builders expect home sales to meet or exceed the year-ago level over the next three months; while brokers expect home sales activity to increase slightly over the same period. Many builders expect the pace of construction activity over the next three months to hold steady or increase slightly.
Many District commercial real estate contacts noted improvements in demand that continued to result in rent growth and increased absorption, but cautioned that the rate of improvement varies by metropolitan area, submarket, and property type. The majority of commercial contractors indicated that the pace of nonresidential and multifamily construction activity matched the year-ago level. Most contacts reported a healthy pipeline of activity, with backlogs greater than or equal to the previous year. Commercial construction contacts' outlook for nonresidential and multifamily construction across the District remained positive, with the majority anticipating activity to match or exceed the current level.
District manufacturers indicated that overall business activity remained strong over the reporting period. Contacts reported that sales levels and demand for new orders were solid, and production levels continued to increase. While there were scattered reports of firms decreasing or holding employment levels steady, most firms suggested they were adding to their payrolls. Expectations for future production levels decreased from the previous period, as a little less than half of contacts expected higher production over the next six months.
Most District transportation firms cited increased activity from April through mid-May. At District ports, container volumes, along with roll-on/roll-off auto and machinery cargo, bulk and breakbulk cargoes, continued to grow. Railroads reported modest gains in intermodal traffic from year earlier levels. However, overall year-to-date rail volumes were down slightly, driven by declines in the movement of nonmetallic minerals (including phosphates), iron and steel scrap, waste and nonferrous scrap, and metallic ores. Freight forwarders and logistics firms noted strong demand for delivery services. Contacts cited concerns that steel and aluminum tariffs will raise overall costs and slow activity. However, while uncertainty over trade policy had not negatively impacted capital projects already underway, a number indicated that they have tapped the brakes on projects in the planning phases. Even so, the majority of contacts expect activity over the next 12 months to increase.
Banking and Finance
District financial institutions continued to report solid loan growth. However, as interest rates increased, bankers expressed concerns about the impact on deposits and liquidity. Community bank contacts reported that they were experiencing deposit pressure as competitors begin to raise rates. Overall, growth in borrowing exceeded growth in deposits; however, the majority of loan growth was still being funded by nonmaturity deposits.
Energy sector contacts described overall industry activity as steady to up from the prior report. Onshore shale drilling activity continued to accelerate, though offshore exploration and production remained depressed. Contacts expect a record year of natural gas supply growth in 2018, which, along with growing crude supply, generated pipeline construction projects in order to increase capacity. Chemical refining companies experienced continued, steady demand. Exports of refined chemical products and crude oil continued to surge as many refineries increased capacity. Rising crude exports also reduced demand for storage needs, leading some firms to pull back from creating or constructing storage capacity. Contacts from the utilities sector noted that while industrial segment growth was up, behavioral trends among residential and commercial customers to reduce energy usage lowered electricity sales.
Agriculture conditions across the District were mixed. Drought conditions abated in parts of Alabama and Georgia but deteriorated slightly in south Florida. May's forecast for Florida's orange crops was down from April. On a year-over-year basis, prices paid to farmers in March were up for corn, rice, soybeans, broilers, and eggs, flat for beef, and down for cotton.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics