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Atlanta: January 2020

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Beige Book Report: Atlanta

January 15, 2020

Summary of Economic Activity
On balance, economic activity in the Sixth District expanded at a modest pace since the previous report, and the outlook among contacts remained positive. Labor market tightness continued to limit growth in some sectors. Wage pressures persisted for lower-skilled positions, and some contacts expect higher wages in the coming year. In line with expectations, nonlabor costs continued to slowly rise. Retailers cited healthy holiday sales levels; however, automotive dealers saw relatively flat sales levels compared to a year earlier. District tourism contacts noted strong leisure travel activity. Residential real estate conditions continued to improve, and commercial real estate firms cited steady sales and leasing activity. Manufacturing activity decelerated as new order levels fell slightly and production levels declined. District bankers noted that financial conditions remained healthy, and the pace of loan growth was positive.

Employment and Wages
Firms reported that attracting and retaining quality talent remained a challenge, which, for employers in the construction, banking, technology, and food services industries, continued to limit growth. While some manufacturing contacts also described this as a challenge, other manufacturers reported a slowing pace of hiring over the reporting period. Businesses reported continuing to explore new recruiting and retention tactics, such as offering a variety of benefits, paying for training and certifications, and clearly demonstrating potential career paths. Many firms continued to pursue investments in automation and technology, which are expected to ultimately reduce headcount requirements.

On average, firms maintained merit increases of 2.5-4 percent, though wage pressure continued to build for lower-skilled positions. Some contacts indicated they expect wages and health insurance costs to accelerate in 2020.

As reported previously, nonlabor costs continued to rise, although still in line with expectations. Contacts noted pricing power with goods impacted by tariffs and in construction. Some contacts reported that the use of pricing transparency tools by consumers and businesses was causing downward pricing pressure. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.6 percent in December. Survey respondents indicated they expect unit costs to rise 1.9 percent over the next twelve months.

Consumer Spending and Tourism
In line with expectations, District retailers reported healthy sales levels during the holiday season. Online sales levels continued to dominate overall sales activity. Automotive dealers reported relatively flat sales levels in November compared to the same period last year.

On balance, District travel and tourism contacts noted a strong holiday travel season with year-over-year growth in leisure travel. The outlook for 2020 remained positive with healthy advance bookings through the first quarter of the year.

Construction and Real Estate
Low mortgage rates continued to help support demand for housing across much of the District. Price appreciation was firm while single-family sales were up from the previous year. The limited inventory of existing homes for sale, as well as the level of starts, suggested that supply remained constrained. Some contacts noted concerns that further price appreciation and low inventories may adversely affect affordability, despite low interest rates. Mortgage loan quality remained stable across the District, although Mississippi saw a slight uptick in delinquencies over the past year.

Commercial real estate (CRE) contacts reported leasing and sales activity remained steady during the reporting period, although some contacts mentioned growing uncertainty as a concern. Overall, most sectors experienced positive dynamics as rents continued to grow and vacancies trended downward at a modest pace. However, some CRE contacts did report that continued growth in construction costs was impacting the start of a modest number of new projects. Contacts continued to report that capital for CRE projects was readily available via banks and non-bank entities, with non-bank entities remaining aggressive in financing both construction and stabilized CRE projects. Modestly growing amounts of leverage, loosening of underwriting standards, and an increase in covenant-lite structures were noted.

Manufacturing firms reported a deceleration in overall business activity since the last reporting period. New order levels fell slightly and notable decreases in production levels were reported. Finished inventory levels declined, and purchasing managers noted that supply delivery wait times were slightly longer. Optimism for future production levels increased among manufacturing contacts, with just over one-quarter of contacts expecting higher levels of production over the next six months, compared to one-fifth in the last reporting period.

District transportation firms cited mixed results since the previous report. Port contacts reported sustained growth in the shipments of containers, automobiles, and heavy equipment. Logistics firms noted substantial increases in ecommerce activity over the reporting period as compared with year-earlier levels. District railroads, however, noted continued year-over-year softness in freight volumes across most commodities, and further declines in intermodal traffic. Air cargo carriers saw lower year-over-year freight volumes.

Banking and Finance
Conditions at District financial institutions remained healthy. Earnings improved over the previous quarter as increases in noninterest income helped offset an ongoing decline in the net interest margin. Asset quality remained stable as most financial institutions reported that they resisted loosening underwriting standards despite increased competition. Though moderating, loan growth continued to be positive.

Oil and gas contacts indicated that production was steady to slightly up over the reporting period; however, firms that service oil-producing wells reported slowing activity. Some chemical manufacturers described continued softening in output, largely related to declining activity in manufactured goods sectors in addition to soft global economic growth. Strong growth continued in the renewable energy sector, particularly in wind and solar. Utilities contacts reported slowing momentum among certain industrial segments.

Agricultural conditions remained mixed. Recent rains improved drought conditions for most of the District, although parts of Florida, Georgia, and Louisiana experienced abnormally dry or moderate drought conditions. The December production forecast for Florida's orange crop was unchanged while the grapefruit production forecast increased; both forecasts remain ahead of last year's production. On a year-over-year basis, prices paid to farmers in November were up for corn, rice, soybeans, eggs, and milk but down for cotton and broilers; beef prices were unchanged. However, on a month-over-month basis, prices increased for cotton, rice, beef, eggs, and milk but declined for corn, soybeans and broilers.

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