Beige Book Report: Atlanta
July 14, 2021
Summary of Economic Activity
Economic activity in the Sixth District continued to expand at a moderate pace from mid-May through June. Demand for labor strengthened, and worker shortages across multiple skill levels and job types intensified. Wage pressures increased and were more widespread. Some nonlabor costs continued to rise, and pricing power remained mixed. Retail sales activity strengthened. Auto sales slowed somewhat. Hotel occupancies increased due to robust leisure travel activity; however, hotels reliant on business travel continued to experience weakness. Demand for housing remained strong, inventories were soft, and home prices accelerated further. Commercial real estate activity improved. Manufacturing activity accelerated and supply delivery times lengthened. Conditions at financial institutions were steady, deposit balances grew, and demand for consumer loans picked up.
Employment and Wages
Overall employment in the District increased since the previous report. Many contacts reported that labor shortages were impeding hiring and putting upward pressure on wages; however, some noted shortages had eased in recent weeks. Lack of available labor remained acute among lower-skilled positions. Shortages of nurses, drivers, IT, and skilled trades workers, particularly mechanics and maintenance workers, persisted. Due to an inability to fully staff, some restaurants and retailers reduced hours, and hotels offered limited guest services and amenities. Manufacturers responded to hiring challenges by reducing the number of shifts, requiring more overtime than typical, and accelerating plans to automate. Some construction firms reported an inability to fill entry-level positions at a reasonable wage and turned to contract and temporary employees as a result. Contacts reported increased poaching of talent, and burnout was mentioned as a concern among under-staffed firms. Many contacts were optimistic that labor availability would improve in the fall as schools restart and enhanced unemployment benefits end; however, there were several who do not expect labor supply to improve for six to nine months.
Wage pressures intensified over the reporting period and upward pressure on wages was more widespread. Though wage pressure was most notable among low-skilled positions, wage increases began spreading across more industries and skill levels. Growing demand, poaching of talent, and retention of employees were cited as the primary drivers of rising wages. Some manufacturers noted that bargaining power had shifted more to the employee, as reports surfaced of employees being allowed to customize individual shift schedules.
Prices
District contacts noted continued rising fuel, shipping, and freight costs over the reporting period, and other input costs such as lumber, though stabilizing somewhat, remained elevated. Reports on pricing power were mixed. Some contacts noted the ability to pass through rising costs, while others absorbed the increases to maintain demand. Most firms considered input cost increases as transitory and expect them to ease as supply chains normalize. The Atlanta Fed's Business Inflation Expectations survey for June showed year-over-year unit costs increased to 3 percent on average. Year-ahead expectations increased to 3 percent in June, up from 2.8 percent in May.
Consumer Spending and Tourism
District retailers reported strong sales in malls located in vacation destinations. Contacts expect consumer spending dollars to shift over the summer to leisure travel-related activities from home related spending. While year-over-year auto sales levels remained elevated, the pace of sales growth slowed since the previous report due to the shortage of new car inventories.
Travel and tourism contacts reported a strong increase in the number of leisure travelers over the reporting period. Atlanta, Miami, and Orlando were among the top destination cities for Memorial Day weekend, kickstarting the summer travel season. Hotel occupancy levels at lower-priced hotels were elevated, but demand for higher-priced hotels dependent on business travelers remained weak. While leisure travel is expected to continue to grow at a healthy pace over the summer, business travel and convention activity is expected to remain soft.
Construction and Real Estate
While low interest rates continued to fuel housing demand, the combination of limited inventory and declining affordability across the District damped home sales somewhat. While many District markets remained attractive to homebuyers looking to migrate from higher cost regions such as the Northeast and West Coast, existing home inventories continued to lag behind demand, causing home prices to rise to peak levels. Although lumber costs declined from peak levels, they remained well-above historic norms. Homebuilders continued to limit sales to stay ahead of rising costs.
On balance, commercial real estate (CRE) activity strengthened since the previous report. Conditions in the retail and hotel segments improved modestly. Multifamily activity improved notably from earlier this year. The softness in the office sector persisted as employers remained cautious about future office space needs, and negative absorption and new deliveries pushed office vacancies upward. Contacts noted that competition is accelerating among lenders for a small segment of CRE loans. Smaller banks and non-bank lenders were noted as the more aggressive CRE lenders.
Manufacturing
Manufacturing firms indicated that business activity accelerated since the previous report. Supply delivery times lengthened as supply chain disruptions continued, which coupled with worker shortages, interrupted production for some manufacturers. Expectations for future production levels remained optimistic.
Transportation
District transportation activity strengthened over the reporting period, and contacts noted that demand for transportation services far outstripped the supply across the industry. Trucking firms and freight brokers reported robust activity combined with limited availability of container, trailer, and truck capacity. Southeast ports experienced unprecedented container volumes and capacity utilization amid continued strong demand for imported goods. Railroad contacts reported solid increases in overall traffic as compared with year-earlier levels. However, dwell times in rail yards rose due to significantly low trucking capacity. Logistics companies saw double-digit increases in volumes and revenues, driven primarily by growth in direct-to-consumer ecommerce activity. Inland barge contacts reported improved utilization, though not to pre-pandemic levels. Transportation contacts expect supply chain disruptions to persist over the next six to 12 months.
Banking and Finance
Conditions at financial institutions remained stable. Loan growth was flat to slightly negative for a majority of portfolios; however, there was some growth in vehicle and other consumer loans. Deposit balances continued to increase and banks added to securities portfolios as a means to generate margin on the additional liquidity. Asset quality remained strong as there was little change in the level of nonperforming assets. Delinquency rates held steady while net charge-offs continued to decline.
Energy
The outlook among District energy contacts continued to improve over the reporting period. Contacts cited strengthening demand for oil and gas, which outpaced exploration and production activity. Chemical manufacturing output surged over the reporting period, and some contacts noted activity returned to or exceeded pre-pandemic levels. Utilities contacts reported rising commercial and industrial activity and stable residential demand. Energy firms continued to pursue investment in renewable energy sources, specifically wind and solar production, and battery storage.
Agriculture
Agricultural conditions remained mixed. Widespread rain across parts of the District resulted in abnormally moist to excessively wet conditions while much of Florida and southern Georgia experienced abnormally dry to moderate drought conditions. Planting progress for much of the region's cotton, soybean, and peanut crops were mostly on par with the five-year average. On a month-over-month basis, the production forecast for Florida's orange crop was up in June while the grapefruit production forecast was down; both forecasts remained below last year's production levels. The USDA reported year-over-year prices paid to farmers in May were up for corn, cotton, soybeans, cattle, broilers, eggs, and milk, but down for rice. On a month-over-month basis, prices were up for corn, rice, soybeans, broilers, eggs, and milk, but down for cotton. Cattle prices were unchanged.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics