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Atlanta: July 2020

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Beige Book Report: Atlanta

July 15, 2020

Summary of Economic Activity
On balance, economic activity in the Sixth District remained weak from mid-May through June. Labor markets improved somewhat as businesses in parts of the region reopened. Nonlabor costs remained subdued. Reports from retailers noted strong consumer demand and increased sales of automobiles. Tourism contacts reported that attractions and hotels had begun to reopen, but revenues and employment levels were expected to be constrained by mandated capacity limits. Demand for residential real estate strengthened and inventory levels fell resulting in upward pressure on home prices. Commercial real estate market conditions were mixed. Manufacturing activity declined, and reports on new orders were mixed. Financial institutions reported a deterioration in conditions as COVID-19 impacted some firms' credit. Overall commercial loan growth was slow and consumer lending remained soft.

Employment and Wages
Labor conditions improved modestly since the previous report. Some firms reported slowly recalling workers and increasing hours as demand increased, while others remained in a holding pattern. Many of those bringing employees back indicated staffing was not back to pre-pandemic levels. While some employers reported taking measures to cut less productive processes and employees, others were able to acquire more skilled and productive staff due to greater talent availability. Although some remote workers returned to the office, many firms indicated success with remote arrangements and noted they will continue this stance for the near term and possibly beyond. Some employers remained committed to maintaining employment levels and plan to reduce hours, wages, and possibly benefits to maintain those levels; however, most indicated that demand will determine staffing levels in the second half of the year. As the support from the Paycheck Protection Program winds down, many employers indicated that they will be forced to lay off workers should business remain weak.

Contacts continued to report wage and salary cuts, except at the low-end of the pay scale and among essential workers. Reports on the disincentive to work from receiving unemployment insurance benefits were mixed.

Contacts continued to note muted input costs and little to no pricing power. Though many described rising costs associated with sanitation practices and Personal Protective Equipment used to protect employees and clients from COVID-19, most reported an inability to pass along these additional costs. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs remained steady, on average, at 1.2 percent in June. Year-ahead expectations increased somewhat to 1.7 percent.

Consumer Spending and Tourism
Retailers reported healthy demand as many stores reopened. While some noted that there was still uncertainty clouding their outlook, expectations are for sales and margins to improve over the remainder of the year. Auto dealers reported increased sales activity since the last report.

Tourism and hospitality contacts noted that they have begun to reopen hotels and attractions in accordance to recommended guidelines. However, business capacity will be constrained by social distancing requirements which will continue to negatively impact both revenue and employment.

Construction and Real Estate
District housing market conditions improved significantly over the reporting period. Pent-up demand and low interest rates accelerated home sales. In many markets, home inventories contracted significantly, creating strong upward pressure on home prices. Despite low interest rates, affordability remained a concern as median home prices continued to reach new highs in several markets. The limited supply of existing homes increased demand for new homes. 30-day delinquencies rose sharply, especially in South Florida markets, despite a surge in forbearances.

Commercial real estate (CRE) contacts reported continued challenges associated with the effects of the COVID-19 pandemic. Hard hit sectors like retail and hospitality reported some stabilization as local economies reopened; lower-price point hotel brands saw improvements in occupancies and values from record lows in May through early June. Multifamily owners reported minor softening in occupancies and were offering greater concessions to minimize lease turnovers. There were growing reports of tenants and borrowers seeking relief. Investment activity was muted compared with pre-COVID-19 levels. Contacts reported that capital was readily available at banks; however, underwriting criteria tightened for the financing of operating CRE projects, and originations continued at a subpar pace. Contacts reported that high-quality asset values declined marginally, and hospitality and retail sector assets declined at a more accelerated pace since the beginning of the pandemic.

Manufacturing contacts indicated that overall business activity decelerated, but at a somewhat slower pace than the previous report. While most firms reported decreases in new orders and production levels, a modest rise in new orders was noted by a few contacts. Purchasing managers suggested that supplier delivery times were getting longer as some supply chain disruptions continued. Contacts also cited a decline in finished inventory levels. Expectations for future production levels declined, with only one-fifth of contacts expecting higher production levels over the next six months.

Transportation activity was largely unchanged since the previous report. Class I railroads saw slight improvements in volumes; however, total rail traffic remained substantially weak. Short-line railroads noted declines in shipments of autos and increases in aggregates and building materials. Ports experienced a significant reduction in auto imports and container traffic was down. Inland barge companies cited modest improvements in demand, but movements of energy products were soft as refineries continued to operate below capacity.

Banking and Finance
Conditions at financial institutions deteriorated over the reporting period due to credit issues related to the COVID-19 pandemic. Provisions for loan loss reserves increased significantly for most institutions, in preparation for increased charge-offs once forbearance periods end, exerting downward pressure on earnings. Additionally, lower short-term interest rates further compressed net interest rate margins. Loan growth remained muted with most centered on approvals of new loans under the Paycheck Protection Program. Except for first lien residential mortgages, consumer loan growth was flat partly due to tightening credit standards. Liquidity remained healthy as deposit levels increased.

Energy industry contacts continued to report weak demand, oversupply, and constrained global storage capacity for crude oil, liquefied natural gas, and refined products such as distillates. Oil and gas producers noted that they expect U.S. oil production to take one to two years to return to pre-COVID-19 levels. Fuel distributors reported little to no demand from municipalities, transit authorities, school systems, and airlines, while demand from food wholesalers and grocers remained solid. Utilities in the region indicated that reductions in demand were not as large as anticipated in the first quarter. While utilities contacts noted that planned capital investments will continue through 2021, other energy sectors reported delayed or cancelled projects, cuts to budgets, and layoffs, some permanent, over the same period.

Agricultural conditions remained weak. Mostly drought-free conditions prevailed. On a month-over-month basis, June's production forecast for Florida's orange crop was down from the previous month and last year, while Florida's grapefruit production forecast was down from the previous month but remained ahead of last year. The USDA reported that in May, year-over-year prices paid to farmers were up for rice, soybeans, and eggs but down for corn, cotton, cattle, broilers, and milk. On a month-over-month basis, prices increased for cotton, rice, cattle, and broilers but decreased for corn, soybeans, eggs, and milk.

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