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Beige Book Report: Atlanta
September 8, 2021
Summary of Economic Activity
Economic activity in the Sixth District expanded moderately from July through mid-August. Demand for labor intensified, and worker availability remained extremely tight. Reports of increasing wage pressures continued and were more wide spread. Some nonlabor costs continued to rise, and pricing power strengthened. Retail sales activity improved, but new car sales declined due to supply chain constraints. Leisure travel activity remained robust. Demand for housing was solid, inventories remained low, and home prices rose. On balance, commercial real estate activity was steady. Manufacturing activity increased and supply delivery times grew. Conditions at financial institutions were stable, on net, but deposit growth slowed, and loan demand declined.
Employment and Wages
Overall, employment in the District strengthened since the previous report. Contacts indicated that labor supply remained extremely tight. Many noted that the expiration of unemployment benefits and the start of the school year in many parts of the District had not increased the supply of applicants as hoped. The recent uptick in COVID-19 cases further constrained worker availability as absenteeism increased due to illness or quarantine. Workers were also less willing to work overtime hours. Several employers noted that applicants did not have the skills they were looking for. Labor shortages continued to hold back activity for many firms–production had been curtailed, projects placed on hold, store hours reduced, and menus at restaurants had been slimmed down. Some childcare centers facing workforce shortages have chosen to close infant rooms because they require a greater number of caregivers. Retention continued to be a growing problem for firms. Restauranteurs noted concerns over "ghosting coasting," where a new hire works for a few days and moves on to the next restaurant without notice before they are let go due to lack of skills. Another growing concern for many employers was described as a "gray wave" of early retirements, particularly among nurses. Employers continued to expand efforts to attract and retain employees.
Wage pressures intensified over the reporting period and upward pressure on wages was relatively widespread. Wage pressure was most notable among entry-level positions. Additionally, mentions of sign-on bonuses was more prevalent. Several firms were actively re-evaluating salary ranges or adjusting wages in reaction to competitor pay increases to retain their workforce.
District contacts continued to cite increasing nonlabor costs, especially for steel and freight, with multiple contacts referencing record increases in shipping container rates. The price of lumber stabilized but remained elevated relative to pre-pandemic levels, while mentions of increased food product costs became more widespread. Contacts cited the ability to pass through price increases with greater frequency, and with minimal resistance. With the exception of labor costs, most contacts still expect cost pressures to ease by 2022. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs increased significantly to 3.3 percent on average in August, up from 2.9 percent in July. Year-ahead expectations increased to 3 percent in August, up from 2.8 percent in July.
Consumer Spending and Tourism
Retail contacts reported strong sales and per capita spending, particularly in leisure travel destinations in the District. Due to persistent labor shortages, restaurants and retailers remained challenged with meeting demand. The pace of new vehicle sales slowed further due to supply chain constraints, and the forecast for 2021 annual sales was revised downward.
Leisure travel activity was solid, on balance, with some hospitality contacts reporting occupancies near 2019 levels. Recent COVID-19 surges are expected to curb activity for the balance of August and increase uncertainty for the Fall season.
Construction and Real Estate
Demand for housing remained strong. However, real estate contacts noted that buyers have become more reluctant to buy as home prices continued to reach peak levels and housing affordability declined in most markets throughout the District. Inventory shortages continued to create upward price pressure, especially in Florida, where prices rose by over 20 percent in some markets.. After limiting sales earlier this year, some builders, as a way to stay ahead of rising costs, have shifted to building more speculative inventory rather than preselling. Although lumber costs have declined, labor and other material costs continued to rise.
Commercial real estate (CRE) activity was steady over the reporting period. Conditions in the retail and hotel sectors improved modestly. Multifamily activity strengthened, though contacts expressed growing uncertainty over the future impacts of the lifting of the eviction moratorium on the sector. The office sector remained challenged as low demand and new deliveries pushed office vacancies further upward. Contacts reported that competition among lenders for a small segment of CRE loans accelerated. Smaller banks and non-bank lenders were noted as the more aggressive CRE lenders.
Manufacturing contacts indicated that demand improved since the previous report. Supply delivery times lengthened as supply chain disruptions continued, which coupled with worker shortages, continued to imped production for many manufacturers. Expectations for future production levels remains optimistic.
District transportation activity remained strong over the reporting period, and contacts noted that demand for transportation services continued to exceed supply amid prolonged labor shortages and constrained container, trailer, and truck capacity. Port contacts reported record container volumes of imported goods. Trucking companies saw robust freight shipments. Railroads experienced significant increases in intermodal traffic; however, dwell times in rail yards increased. Air cargo contacts noted steady demand, though there was growing uncertainty surrounding the impact of COVID-19 outbreaks on activity. Transportation contacts anticipate further strengthening in activity but no relief from supply chain disruptions over the next 3-6 months.
Banking and Finance
Conditions at District financial institutions were stable. Net interest margins remained compressed, though earnings improved due to noninterest income generated through asset sales and increased transactions. Deposit levels remained elevated, but deposit growth slowed. On balance, lending activity decelerated. Commercial and industrial loan balances on institutions' balance sheets declined as new Paycheck Protection Program (PPP) originations ended and balance runoffs increased due to streamlining of the forgiveness process. Demand for consumer loans also declined. Residential real estate balances increased slightly amid increased competition for loans. Additions to allowances for loan losses slowed as delinquency rates held steady.
Activity in the energy sector remained solid over the reporting period, however, contacts expressed uncertainty about the impacts of COVID-19 on global demand for oil and gas products, and consequently, refinery utilization. District contacts reported sustained improvement in oil and gas production and continued efforts to incorporate efficiencies into drilling activity. Utilities industry contacts noted stronger than expected residential sales, which were offset by weaker than expected commercial and industrial sales. They also continued to report power generation upgrades and significant investment in renewable energy development and production.
Agricultural conditions remained mixed. Widespread rain relieved the District of drought conditions. With planting completed, the District's corn, cotton, soybean, peanut, and rice crop conditions were mostly on par with this time last year. District crop production forecasts were up on a year-over-year basis for cotton, soybeans, corn, and peanuts but down for rice. On a month-over-month basis, the production forecast for Florida's orange crop was up in July while the grapefruit production forecast was unchanged; both forecasts remained below last year's production levels. On a year-over-year basis, the USDA reported cropland values were up across the District states. The USDA reported year-over-year prices paid to farmers in June 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, cotton, rice, cattle, and broilers but down for soybeans, eggs, and milk.
For more information about District economic conditions visit: www.frbatlanta.org/economy‐matters/regional‐economics