Beige Book Report: Atlanta
July 18, 2018
Summary of Economic Activity
On balance, reports from Sixth District business contacts indicated that economic activity continued to expand at a modest pace from mid-May through June. Although a number of contacts' sentiment declined due to uncertainty related to the impact of tariffs and tariff rhetoric, the overall outlook among businesses remains positive as most expect an increase in activity for the second half of the year. District firms continued to report difficulties filling positions with quality labor. On balance, wage growth remained steady. Businesses continued to report an increase in select non-labor input costs. District merchants noted sales activity increased since the previous reporting period and sales of light trucks and small SUVs improved from a year ago. The tourism sector experienced solid activity throughout most of the District. Real estate contacts noted that new home sales were up slightly and existing home sales were flat to slightly down compared to a year earlier. Overall, the housing market experienced modest price appreciation. Commercial real estate contacts indicated that activity was solid. Manufacturers reported growth in new orders and increasing production levels.
Employment and Wages
Broadly, business contacts across the District cited low availability of quality labor as a growing challenge. Contacts noted that this was a problem often not solved by increasing pay but by focusing on developing and training internal staff. Although firms in particular geographies struggled to fill certain positions, overall, most continued to add to headcounts. Some contacts cited persistent challenges with turnover; as a result, they were increasingly investing resources in retention efforts.
The intensity of wage adjustments remained mixed across the region. On average, three percent annual increases were the norm; however, a growing number of firms noted that when they were not able to meet demand with existing staff, wage increases were around five to ten percent (or greater) as an effort to attract and retain workers. Business contacts continued to report using benefits, bonuses, incentives, and other forms of compensation that are temporary or can be withdrawn if necessary.
Prices
District firms reported some increases in non-labor input costs, particularly for steel, aluminum, and transportation, with limited accounts of an ability to pass along these increases. Expectations of rising costs related to tariffs continued to contribute to vendor price increases for commodities. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 2.0 percent in June. Looking ahead, survey respondents indicated that they expect unit costs to rise 2.1 percent over the next twelve months.
Consumer Spending and Tourism
On balance, District retailers reported an increase in sales levels compared to the last report. Discount stores and on-line sales continued to be a leading competitive driver in the industry. Vehicle dealers reported an uptick in the level of sales of light trucks and small SUVs for the month of May compared to the same time period last year.
Tourism activity for the summer season across the District was described as healthy. The hotel market in south Florida continued to experience strong demand. While this was on par with expectations, there were some opportunities for growth based on higher-than-expected demand in weekend leisure and group bookings. Contacts in New Orleans reported an uptick in the number of conventions being held in the city over the summer. Year-to-date Mississippi casino gaming revenue increased compared to the same time period last year.
Construction and Real Estate
On balance, reports from District residential real estate contacts indicated modest but ongoing growth. Many builders reported that construction activity was up from the year-ago level. The majority of builders noted that buyer traffic was up with sales slightly higher, while several brokers indicated there was no change in buyer traffic relative to the year-earlier level and that sales were flat to down slightly. Reports on inventory levels were mixed and most brokers and builders reported home price gains. District brokers and builders expect that home sales activity over the next three months will primarily hold steady.
Many District commercial real estate contacts noted continued strong demand. Contacts cited that vacancy rates have been steady or falling and the rate of concessions had been steady over the last 90 days. The majority of commercial contractors indicated that, on balance, the pace of nonresidential construction activity at least matched the year-ago level, with the exception of multifamily construction which was characterized as unchanged to down. Most contacts reported a healthy pipeline of activity, with backlogs greater than or equal to the previous year. The outlook for nonresidential and multifamily construction among commercial construction contacts across the District remained positive, with the majority anticipating activity to match or exceed the current level.
Manufacturing
The majority of District manufacturing contacts described overall business activity as solid during the reporting period. Firms indicated that growth in new orders was strong and that production levels were increasing. Purchasing managers reported that supply delivery times were getting notably longer and finished inventory levels were rising. Relative to the previous reporting period, expectations for future production were less upbeat, with about one-third of contacts expecting higher production over the next six months.
Transportation
Transportation activity was largely unchanged since the previous report. District port contacts continued to note significant year-over-year increases in containerized shipments, and bulk and breakbulk cargoes; automobile and equipment freight also rose. Trucking companies noted an increase in activity from year earlier levels; demand for freight services was high, which was attributed to an improved economy and increased e-commerce shipments. Trucking capacity remained tight due to a lack of skilled truck drivers. Contacts at District railroads noted that total traffic year-to-date was flat to slightly down as compared with the same period last year, but intermodal activity saw a modest uptick. Most transportation contacts expect higher levels of activity over the second half of the year.
Banking and Finance
District financial institutions' earnings normalized following a quarter when earnings were negatively impacted by tax reform. Asset growth slowed as higher interest rates impacted some loan demand, especially for real estate products. Asset quality metrics at financial institutions were strong. Transaction accounts remained a significant portion of the deposit base and provided the majority of funding, but borrowings were steadily rising as asset growth recently started to outpace deposit growth. Financial institutions in urban markets note a greater level of deposit pressure in contrast to more rural markets where deposits are stable.
Energy
Overall, District energy sector activity continued to pick up. Industrial projects were reported across the District. Onshore shale drilling activity remained strong. Although offshore exploration and production remained subdued, there was a slight uptick in activity over the reporting period. Production and exports of refined chemical products and crude oil continued to grow as refineries increased capacity. Contacts from the utilities sector noted that the industrial segment still outpaced residential and commercial growth.
Agriculture
Agriculture conditions across the District were mixed. Significant rain improved drought conditions in Alabama, Florida, and Georgia; however, there were abnormally dry conditions reported mostly in Louisiana and to a lesser degree in Mississippi and Tennessee. There were also some areas that experienced above-normal temperatures and locally heavy rains, resulting in some crop stress. June's forecast for Florida's orange crop was unchanged from May, but down significantly from last season's production. On a year-over-year basis, prices paid to farmers in April were up for corn, rice, soybeans, broilers, and eggs and down for cotton and beef.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics