Beige Book Report: Atlanta
May 27, 2020
Summary of Economic Activity
Sixth District business contacts reported that economic activity continued to decline from April to early May due to the COVID-19 pandemic. Labor market activity remained weak and nonlabor costs declined overall. Retailers reported further declines in discretionary consumer spending, although sales of essential items continued to grow; ecommerce activity accelerated. Auto sales were subdued. Hospitality contacts noted record low revenues. Despite soft demand for new and existing homes, inventories fell and home prices remained steady. Commercial real estate market reports were mixed. Overall, manufacturing activity contracted and new orders declined significantly. Financial institutions reported growth in commercial loans as businesses accessed lines of credit and the Paycheck Protection Program (PPP) and some softness in consumer lending.
Employment and Wages
Overall, District labor markets continued to deteriorate from closures related to the COVID-19 pandemic and the resulting decline in demand for products and services. Several contacts noted they were redeploying workers from low to high demand areas within their organization. Many contacts reported success in securing a PPP loan, which allowed them to avoid layoffs. Although more furloughs and layoffs were announced, most contacts were furloughing employees with medical benefits rather than laying off in hopes of re-engaging them when demand returned. Several employers noted concern that the generosity of unemployment benefits may make it difficult to attract workers once demand improves especially among lower paid jobs. Most contacts noted that they had frozen or slowed hiring with the notable exception of high demand sectors such as grocery and home improvement stores.
Contacts noted that weaker demand resulted in more reports of pay cuts, elimination of bonuses, and reduced hours; these cuts were more broad based than in the previous report. Some temporary increase in hourly wages and bonuses continued to be reported among high demand or essential workers, however there was no evidence that these inducements were increasing substantially or spreading to other sectors.
Prices
Most contacts reported input costs decreased over the reporting period due to the impact on demand from COVID-19. As demand shifted from restaurants to grocers as a result of safer-at-home practices, some food service supply chains were left with excess inventories while others, such as meat processing and packing, experienced shortages. However, the majority of firms have not increased prices, either due to a lack of pricing power or as a show of goodwill to troubled consumers. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs declining to 1.2 percent in April, as sales levels declined dramatically "compared to normal." Year-ahead expectations, on average, declined to 1.4 percent.
Consumer Spending and Tourism
Similar to the last report, continued declines in discretionary consumer spending due to COVID-19 was partially offset by sales growth in grocery and household products, office equipment, and home improvement goods. Ecommerce activity continued to accelerate as brick-and-mortar sales continued to decline. Reports from businesses in locales that were cleared to reopen indicated implementing social distancing measures and heightened sanitation efforts. While auto sales were muted, contacts noted that the rate of decline was slower than expected.
Across the District, tourism and hospitality contacts reported that revenue per available room had reached a historical low for April as a result of COVID-19. Most contacts were in the process of developing their reopening strategy which would include marketing efforts and implementation of social distancing and elevated sanitation, among other things. Firm reopen dates had not yet been determined and the general sentiment was that the recovery for this industry would be moderately slow.
Construction and Real Estate
The District housing market continued to show signs of significant disruption as a result of COVID-19. Contacts indicated a sharp overall decline in pending home sales, as well as a significant contraction in homes available for sale. Mortgage financing remained constrained as many lenders increased credit overlays. However, contacts suggested that purchase activity improved since the beginning of April as more buyers sought to take advantage of low interest rates. Home prices remained resilient as sellers maintained asking prices. Though new home starts and sales were down sharply from a year ago, contacts indicated that cancellations were lower than expected and builders did not need to significantly increase incentives in order to close sales.
Commercial real estate (CRE) contacts reported continuing challenges associated with the effects of COVID-19. Reports were mixed, as rent collections exceeded low expectations and investment activity continued to slow during the reporting period. Contacts continued to report a deceleration in new leasing inquiries, though leasing activity that was already in the pipeline appeared to be steadily continuing to move towards completion. Reports of a greater number of tenants seeking rent relief emerged. Declining tourism and travel conditions have had a significant impact on CRE activity across the District. Contacts reported that capital was readily available for financing stabilized CRE projects. Reports also indicated that accurately appraising property values has become much more difficult and anticipate this to last through the remainder of the year.
Manufacturing
Manufacturing firms reported a decrease in overall business activity, steered by a notable decline in new orders. To adjust to weakening demand, contacts described lowering production levels by reducing capacity and, in some instances, temporarily halting production at some of their plants. Some purchasing managers indicated they were experiencing delays in deliveries due to disruptions in supply chains. Across the board, contacts had or planned to implement enhanced safety procedures at their plants to promote social distancing and to provide a sanitary work environment.
Transportation
Transportation activity weakened over the reporting period, and about half of contacts noted significant disruption to operations due to COVID-19. Air cargo companies reported further capacity reductions as more than roughly two-thirds of worldwide passenger flights were suspended. However, demand for air cargo services remained robust; thus, carriers operated cargo-only flights by using passenger aircraft to meet demand. Railroad contacts noted continued year-over-year declines in overall traffic in petroleum and petroleum products, metals, lumber, and motor vehicles and parts. District ports cited continued softness in container cargo. Third-party logistic firms saw trucking volumes fall off as panic buying of essential consumer goods subsided.
Banking and Finance
Conditions at financial institutions deteriorated slightly. While net interest margins remained stable, emerging credit issues related to COVID-19 prompted an increase in provisions for loan loss reserves, which significantly lowered earnings. Loan growth accelerated for the commercial and industrial segment due to a combination of customer drawdowns of existing lines of credit and approvals of new loans under the PPP. Both commercial real estate and construction loan growth declined due to weaker demand but remained positive. Residential real estate loan growth increased due to lower interest rates and a high level of refinancing. However, consumer loan growth declined due to lower demand and credit standards being tightened. Increased deposits and lending facilities created by the Federal Reserve System kept liquidity stable.
Energy
Oil and gas producers and servicers reported temporary closures of wells as global demand for crude oil remained weak among historic oversupply. Utilization at refineries and chemical manufacturers was down to historic lows, aside from those used to make personal protective equipment, disinfectant, sanitizer, and other high-demand products related to COVID-19. Thus, refining and chemical manufacturing contacts reported layoffs, spending cuts, and maintenance delays.
Reports indicated that widespread maintenance delays into the second half of the year will create added strain on limited maintenance contractors, staff, and equipment. Industrial construction contractors reported extensive project delays and cancellations. While some energy contacts expect demand to rise in late summer, many noted that the industry will still have to contend with crude oil oversupply and storage overhang. Utilities contacts reported decreased demand for power overall, largely from the commercial segment.
Agriculture
Agricultural conditions softened. Most of the District remained drought free, with the exception of much of Florida, southern Louisiana, and other parts of the Gulf coast region, which experienced abnormally dry to severe drought conditions. On a month-over-month basis, the April production forecast for Florida's orange crop was down from last month's forecast and last year's production, while the grapefruit production forecast was down from last month's forecast but ahead of last year's production. The USDA reported that for March, year-over-year prices paid to farmers were up for corn, rice, eggs, and milk but down for cotton, soybeans, cattle, and broilers. On a month-over-month basis, prices increased for broilers and eggs but decreased for corn, cotton, rice, soybeans, beef, and milk.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics