Beige Book Report: Atlanta
December 1, 2021
Summary of Economic Activity
Economic activity in the Sixth District grew at a moderate pace from October through mid-November. Demand for labor remained strong amid a tight market. Reports of wage increases were pervasive. Nonlabor costs continued to rise, and pricing power strengthened. The pace of retail sales was robust; auto sales, however, remained challenged due to supply chain constraints. Strength in domestic leisure travel activity persisted, while business travel remained soft. Residential real estate sales increased even as mortgage interest rates rose. Commercial real estate conditions improved. Manufacturing activity was solid, though supply chain disruptions hindered production somewhat. Conditions at financial institutions were stable, and loan demand improved.
Employment and Wages
Demand for labor remained strong over the reporting period, as the extremely tight labor supply persisted. Turnover rates rose as employees were lured away by competing firms offering significant wage increases and greater flexibility. Several firms lessened educational or work experience requirements, and one noted they are considering hiring "vocational graduates from the prison system." A trucking company reported an easing of requirements for CDL drivers by covering more routes with smaller box trucks or pick-up trucks pulling trailers. Some large manufacturers lent workers to component suppliers to relieve labor-related bottlenecks. A technical college reported that there remains a disconnect for many students between the coursework they are taking and the skills needed by employers; too few are pursuing careers in high-demand occupations such as advanced manufacturing, skilled trades, construction, aviation, and automotive.
Upward pressure on wages to attract and retain talent remained relatively widespread. Several contacts mentioned that labor costs were already being passed along to consumers with little resistance, while others said plans were underway to do so. Many contacts noted that containing labor costs is a priority.
Prices
Nonlabor costs continued to increase, and inputs such as raw materials, the availability of which remained exacerbated by supply chain disruptions, rose significantly. Several contacts reported that costs of freight and construction materials increased multiple times over the last year. Pricing power was strong, though contract negotiations were resulting in shorter terms. Most contacts expect cost pressures to ease steadily over 2022 but remain above pre-pandemic levels. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were relatively unchanged in November at 3.6 percent. Year-ahead expectations increased to 3.3 percent in November, up from 3.1 percent in October. Both measures have increased sharply over the last nine months.
Consumer Spending and Tourism
District retailers reported strong consumer demand and expectations for robust holiday sales. Some contacts with large bases of lower-income consumers cautioned that the drawing down of excess savings as fiscal supports expire could result in an eventual softening of demand among these consumers. Automotive dealer inventories remained challenged by supply chain issues; however, some manufacturers have excluded certain add-on features to expedite the delivery of vehicles to market.
While activity at limited-service hotels remained strong, contacts noted that a lack of available labor limited capacity and the ability to operate at pre-pandemic levels. Many contacts described the robust level of domestic leisure activity as pent-up demand that will normalize over the next 24 months. Business travel and convention bookings remained well below pre-COVID levels, but contacts expect activity to pick up in the first half of 2022.
Construction and Real Estate
Although still strong, housing demand moderated further from the record highs experienced over the past year. Nonetheless, the recent uptick in mortgage interest rates led to an improvement in residential sales, spurred by homebuyers' expectations that interest rates will rise further. On a year-over-year basis, home prices increased sharply in markets like Atlanta, Nashville, and central and south Florida. Affordability contracted further throughout the District. Housing starts were up from year-earlier levels in most markets. Homebuilders noted elevated interest from institutional investors seeking to buy or build new homes for single-family rental units.
Commercial real estate (CRE) activity strengthened over the reporting period. Contacts reported improving conditions in the office sector as more businesses reopened. Activity in the multifamily sector accelerated, though uncertainty remained regarding future impacts from the lifting of the eviction moratorium. Contacts continued to report that competition is accelerating among CRE lenders. Smaller banks and non-bank lenders have been identified by contacts as some of the more aggressive CRE lenders.
Manufacturing
District manufacturers continued to report healthy demand over the reporting period, with several noting record sales. Lead times for components were extended as supply chain interruptions persisted, hampering production for some firms. Most manufacturers anticipate stronger sales over the next 6-12 months; however, lingering labor shortages, rising input costs, and disrupted supply chains could challenge firms' ability to meet this demand.
Transportation
Transportation activity remained robust over the reporting period. District ports reported continued growth in container volumes, noting that customers were buying safety stocks of inventories, citing a "just in case, rather than just in time" approach. However, containers were slow to move off port due to a lack of chassis and trucks. Inland waterways experienced improvement in the movement of energy-related cargoes as Gulf refineries recovered from damages caused by Hurricane Ida. Air cargo carriers reported higher demand as the cost of container shipping exceeded air freight rates, in some cases. Some transportation contacts do not anticipate a normalization of the overall supply chain until late 2022 or 2023.
Banking and Finance
District banking activity remained steady. Financial institutions experienced stronger consumer and residential mortgage loan growth, and improved CRE loan demand. Although margin pressures remained due to the low interest rate environment, interest income rose as loan demand strengthened. Deposit levels were stable and remained elevated. Asset quality was unchanged with loan losses and net charge-offs still near historical lows.
Energy
Activity across energy sectors picked up over the reporting period as global demand for energy products strengthened. While contacts reported sustained improvement in oil and gas production, some acknowledged that capital formation for exploration and production has become increasingly challenging. Chemical manufacturing surged in the region, however, high crude oil and natural gas costs and supply chain bottlenecks for numerous inputs continued to constrain growth. Utilities industry contacts noted a sizeable uptick in commercial activity, along with sustained strength in residential and industrial sales. Contacts also continued to report significant investment in renewable energy development and production, primarily in solar, wind, and carbon capture technologies.
Agriculture
Agricultural conditions remained mixed. Most of the District remained drought free. Agriculture producers indicated supply chain issues and labor scarcity are putting pressure on margins. On a year-over-year basis, production forecasts for the District's corn and soybean crops were up while rice, peanuts, cotton, and sugarcane forecasts were down. The USDA reported year-over-year prices paid to farmers in September were up for corn, cotton, rice, soybeans, cattle, broilers, eggs, and milk. On a month-over-month basis, prices were up for cotton, cattle, broilers, and eggs but down for corn, rice, and soybeans while milk prices were unchanged.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics