Beige Book Report: Atlanta
October 21, 2020
Summary of Economic Activity
Economic conditions in the Sixth District improved slightly over the reporting period but remained below pre-COVID-19 levels. Labor market activity improved modestly as employers continued to add to payrolls. Nonlabor costs remained generally muted, but costs related to construction and COVID-19 safety measures continued to rise. Retail sales grew but largely remained below year-earlier levels. Softness in tourism and hospitality persisted as COVID-19 restrictions continued to limit activity in many parts of the District. Residential real estate demand and home prices increased while inventory levels remained tight. Commercial real estate activity stabilized. Manufacturing activity increased and new orders and production levels rose. Banking conditions stabilized, and loan loss reserves continued to grow.
Employment and Wages
Contacts reported modest improvements in labor market conditions since the last report. On balance, District employers continued to add to payrolls over the reporting period. Firms continued to slowly recall workers as demand returned. However, several contacts reported that some prior staff cutbacks had become permanent, while others noted using attrition to shrink headcount. Many contacts indicated that the pool of available workers was ample and speculated that the expiration of the enhanced unemployment insurance benefit had begun to improve the supply of workers for lower-skilled positions. Employers remained concerned about workers' abilities to balance workloads with the demands of childcare and the return to school, in person or virtual.
Reports on wages and compensation varied among contacts. Some businesses rescinded salary cuts, while others maintained pay cuts and salary freezes. Wage increases remained concentrated at the low end of the pay scale.
Prices
Over the reporting period, contacts noted some rising input costs, particularly for lumber and steel. Expenses associated with personal protective equipment, testing, and sanitation practices to protect employees and customers from COVID-19 remained significant, and increased technology expenses for extended work-from-home postures were also reported. Insurance costs were also cited as increasing. Pricing power remained muted, with little ability to pass through these costs. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs decreased significantly, from 1.5 percent in August to 1.3 percent on average in September. Year-ahead expectations remained largely unchanged at 1.6 percent.
Consumer Spending and Tourism
Reports from retail contacts were little changed from the previous report. Sales relative to this time last year remained soft but were better than expected with continued strength in home-related products. Contacts in Florida and Louisiana anticipate an uptick in demand as those states implemented final phases of reopening. Contacts shared concerns for the upcoming holiday season sales period, citing political uncertainty and the potential for another spike in COVID-19 cases as potentially hampering sales growth.
Travel and tourism contacts reported that although demand through the summer season was softer than a year ago, tourism activity through early October was recovering slowly. COVID-19 restrictions continued to negatively impact the industry in most District states as hospitality contacts reported that group travel and conference bookings continued to be postponed or cancelled through the second quarter of 2021.
Construction and Real Estate
Demand for housing continued to recover, and new home construction continued to fall short of demand. Inventory levels of existing homes dropped to historic lows and shortages are expected to remain a long-term market headwind. Limited supply and rising construction costs have led to increased upward pressure on prices. However, historically low interest rates continued to help offset rising prices. Contacts shared concerns over potential higher mortgage defaults as surges in delinquencies in markets such as Orlando and Miami were noted.
Commercial real estate (CRE) contacts reported continued stabilization amidst improving employment conditions and customer traffic. Hospitality, which was especially hard hit at the onset of the pandemic, was generally stagnant. Retail remained challenged; however, contacts reported marginal improvement as rent collections increased at poor performing shopping centers. The rate of unit leasing remained muted compared with pre-pandemic rates. Owners of lower-price multifamily properties reported an increase in late rent payments and some softening in occupancies. While improving, low levels of tourism and travel were having a notable impact on activity across the hospitality and retail sectors. Due to slower transaction and leasing volumes, asset valuation remained difficult.
Manufacturing
Manufacturing contacts reported an increase in overall business activity since the previous report. Firms indicated that new orders and production levels rose, and supply delivery times increased. Finished inventory levels were also reported to have increased, after declining over the last three reporting periods. Expectations for future production levels rose, with half of contacts surveyed expecting higher levels of production over the next six months.
Transportation
Transportation activity across the District improved over the reporting period. Trucking firms reported that shipments of consumer staples and building materials remained above pre-COVID-19 levels. Port contacts reported significant growth in container traffic, driven by increases in e-commerce, and ocean carriers were operating at full capacity and reinstating vessels that were suspended as a result of the pandemic. Railroads reported that overall traffic improved, intermodal shipments of consumer goods strengthened, and industrial freight volumes stabilized but were down from year-earlier levels. Inland waterway contacts noted that demand for barge services was below pre-pandemic levels, owing primarily to fewer shipments of domestically-produced refined products.
Banking and Finance
Conditions at financial institutions stabilized over the reporting period. Earnings remained pressured by compressed net interest rate margins and higher provisions for loan losses. Persistently elevated deposit levels kept liquidity strong. Loan growth was flat as underwriting conditions remained tight for many loan products outside of portfolios such as residential real estate. Requests for additional forbearance on loan payments declined.
Energy
Hurricanes Laura and Sally made landfall within the District during the reporting period, causing supply disruptions as production, refining, and chemical processing activity stalled, according to energy contacts. Power generation, transmission, and distribution infrastructure in southwest Louisiana was severely damaged by Hurricane Laura, leaving hundreds of industrial sites without power for a sustained period. Crude oil refiners continued to experience weak demand amidst a global inventory glut. Refining contacts noted that utilization rates remained near historically low levels and are expected to remain low heading into the fall or until fuel prices rise enough to justify increasing output. Still, some energy contacts reported that large industrial petrochemical refining and chemical processing plant expansion projects that were delayed earlier in the year were gradually picking up again. Utilities contacts noted ongoing investment and integration of renewable energy resources.
Agriculture
Agricultural conditions remained weak. While drought-free conditions prevailed in most parts of the District, some producers reported crop and infrastructure damage caused by Hurricanes Laura and Sally. The USDA reported that District farmland values were up on a year-over-year basis except in Florida where cropland value was unchanged. Cotton, peanut, and rice harvesting progressed, though below the pace of their five-year averages, while soybean harvesting was near its five-year average. The USDA reported that in August, year-over-year prices paid to farmers were up for cotton, rice, soybeans, and milk, but down for corn, cattle, broilers, and eggs. On a month-over-month basis, prices increased for rice, soybeans, and cattle but decreased for corn, cotton, broilers, eggs, and milk.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics