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Beige Book Report: Atlanta
December 2, 2020
Summary of Economic Activity
On balance, economic activity in the Sixth District expanded modestly from October through mid-November. Labor markets continued to recover as some firms added to headcounts where demand was strong. Some contacts noted rising nonlabor costs, especially related to construction and shipping. Retailers reported mixed activity. Auto dealers reported solid retail vehicle sales, offset by softness in fleet sales. Tourism and hospitality noted slow improvements in activity. Residential real estate remained strong, but challenges in commercial real estate markets continued. Manufacturing activity accelerated as new orders and production levels rose. Banking conditions stabilized, but net interest margins remained compressed.
Employment and Wages
On balance, contacts continued to report modest improvements in labor market conditions. Increases in headcounts were strongly tied to improvements in demand. Some firms noted the ability to maintain or increase productivity levels with fewer employees, while others reported onboarding new employees to provide relief to overworked staff. Seasonal hiring was notable among retailers, distributors, and delivery firms. Driver shortages intensified as capacity constraints due to social distancing measures at driver training locations slowed the number of new certified drivers. Business contacts indicated that companies in higher cost-of-living geographies were recruiting accounting, IT, and other professional staff to work remotely full-time, and are able to pay salaries that were higher than local market rates, but often lower than the salary paid in their geography. Those hiring for higher skilled positions noted an ability to find quality applicants. Overall, the supply of available lower-skilled workers remained limited. Childcare challenges continued to be noted and there were some reports of accelerations in retirements.
There were fewer reports of wage and salary reductions since the previous report, and some firms began to restore pay cuts or plan to do so in 2021. Increases in wages were largely targeted to specific occupations and lower-skilled positions.
Over the reporting period, contacts continued to note some rising input costs, particularly for lumber and aluminum. Shipping costs rose as solid demand put increased pressure on capacity; however, fuel costs remained low. Firms continued to report little to no pricing power, but some anticipate having the ability to pass through increased costs in 2021. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs decreased significantly to 1.3 percent in November, down from 1.6 percent in October. Year-ahead expectations increased to 1.9 percent from 1.6 percent since the last reporting period.
Consumer Spending and Tourism
Retailers reported mixed activity over the reporting period, though demand generally outperformed forecasts. Some retailers noted cutting store hours and reducing costs to preserve margins. The outlook for the holiday season remained uncertain. Although overall District auto sales declined from September to October, retail auto sales remained solid while fleet sales fell significantly as compared with year-earlier levels.
Travel and tourism contacts reported that the industry was slowly recapturing demand, as some contacts reported a pickup in leisure travel. Business travel continued to struggle. Based on the current trajectory, a full recovery is not expected until 2023.
Construction and Real Estate
Although they moderated slightly from peak levels experienced over the summer, District home sales remained strong, with low interest rates continuing to be the primary driver of demand. Existing home inventory remained tight and new home construction continued to lag demand. Construction costs, especially lumber and labor, remained elevated. Consequently, home prices continued to rise, putting pressure on affordability. Rural areas in Alabama, Mississippi, and Louisiana, urban markets in south and central Florida, and the southern portion of the Atlanta metro area were geographies that stood out in terms of the share of mortgages that remained in some stage of delinquency.
Business contacts reported that the commercial real estate sector continued to encounter bifurcated conditions associated with the effects of the pandemic. Hospitality, which was especially hard hit earlier this year, saw modestly improving conditions come to an end, as occupancies declined from the prior reporting period. Retail remained challenged; however, contacts reported limited improvement in rent collections. Low levels of tourism and travel have had a notable impact on activity across the hospitality and retail sectors. Recent asset valuations in public markets confirmed that values are deteriorating, which, along with tighter underwriting standards, may create impediments to new lending.
Most manufacturing firms reported an increase in overall activity over the reporting period as new orders and production levels continued to climb. Production managers indicated that supplier delivery times were getting longer, and finished inventory levels remained slightly elevated. Expectations for future production levels declined, with over one-third of contacts expecting higher levels of production over the next six months compared to one-half during the previous reporting period.
District transportation contacts indicated that demand was largely consistent with the previous report. Total year-over-year rail traffic rose as robust intermodal freight volumes offset declines in agriculture products, petroleum and petroleum products, and aggregates and coal. Trucking companies noted solid demand; however, driver shortages continued to constrain capacity for some. At District ports, container traffic increased, while roll-on, roll-off cargo, breakbulk and bulk freight volumes remained below year-earlier levels. Several contacts reported strong warehouse expansion activity across the region.
Banking and Finance
Banking conditions stabilized, taking pressure off of earnings. Net interest margin compression continued but significant additions to provisions for loan losses were not required. Banks appeared to struggle to find suitable lending opportunities while deposit levels remained elevated. Outside of residential real estate and commercial loans, loan balances across multiple portfolios were stagnant or edged downward. Instead of increasing loans, banks held higher balances in cash accounts or securities portfolios.
Hurricane Zeta made landfall within the District during the reporting period, causing temporary disruptions to oil and gas production in the Gulf of Mexico. Amid continued soft demand for crude oil, industry contacts reported consolidation among refiners and expect more in the coming months. Petrochemical manufacturers noted that reduction in crude oil refining has lowered the availability of residual products used for fuel, which ultimately has affected production supply chains, capabilities, and costs. While some energy contacts noted that petrochemical and chemical processing expansion projects were gradually restarting, others reported that many projects that were delayed will be on hold into 2021. Within the utilities sector, residential power demand was up compared with this time last year; however, commercial and industrial segments, although recovering, were down overall. Contacts described that recovery of commercial energy usage slowed in recent weeks since demand is sensitive to COVID-19 movements. Still, capital investment within the utilities sector remains solid, including increasing investment in renewable energy sources in the industry's ongoing pursuit of increased decarbonization.
Agricultural conditions were mixed. While drought-free conditions prevailed in most of the District, some producers reported crop damage caused by recent hurricanes. Contacts noted increases in some agriculture commodity prices attributed to changes in supply and demand, the USDA Food Box program, and improved trade with China. Some contacts also noted that increased federal assistance helped improve balance sheets. Cotton harvesting progressed, though below the five-year average pace, while soybean and peanut harvesting were near their five-year averages. The USDA reported year-over-year prices paid to farmers in September were up for rice, soybeans, cattle, and eggs, but down for corn, cotton, broilers, and milk. On a month-over-month basis, prices increased for corn, cotton, soybeans, cattle, and eggs, but decreased for rice, broilers and milk.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics