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Beige Book Report: Atlanta
January 12, 2022
Summary of Economic Activity
Economic activity in the Sixth District expanded moderately from mid-November through December, even amidst widespread outbreaks of the Omicron variant late in the reporting period. Demand for workers remained strong and labor market tightness persisted. Upward pressure on wages was widespread. Nonlabor costs grew, albeit at a slower pace. Retail sales were solid; auto sales, however, remained challenged due to supply chain constraints. Domestic leisure travel was strong. Business travel and convention bookings picked up somewhat, though increases in Omicron cases precipitated some postponements and cancellations in the near term. Robust housing demand continued. Conditions in commercial real estate improved. Manufacturing activity was healthy. Conditions at financial institutions were steady, though deposit levels declined, and loan demand slowed somewhat.
Employment and Wages
Demand for labor was strong over the reporting period amidst pervasively tight labor supply. Most employers reported that qualified candidates for open positions remained in short supply across all jobs but particularly for entry-level positions. Shortages of workers were reported to be exacerbated by childcare availability issues and remaining Federal subsidies, such as the advance on child tax credits. Additionally, geographic competition for workers has expanded with increased remote-work options. Tight labor conditions have firms intensely focused on retention. Some reported being proactive with wage increases while others added "stay" bonuses that reward a longer-term commitment of two years. Firms continued to evaluate greater flexibility for workers and even more time off, including additional "self-care days," remote work, and four-day workweeks. Many continued to advocate for COVID vaccines, but not mandate them, with the ultimate aim to retain employees. Several employers said they are making plans to reduce their labor dependence through technology and automation. It was noted that some smaller firms were making a concerted effort to stay under the 100-employee threshold that would exempt them from costly COVID vaccine and testing regulatory requirements. In late December, some employers noted an uptick in absenteeism related to Omicron which resulted in curtailed operations.
Upward pressure on wages remained relatively widespread. Increases were most notable at the lower end of the pay scale and among new hires. Most contacts indicated they feel like they are chasing market wages to attract and retain staff. Wage growth remains above plan for most firms, and many anticipate higher wage growth in 2022.
Several contacts noted that many nonlabor costs leveled off or increased only slightly since the previous report, though the rising cost of steel and freight was frequently mentioned. Most contacts expect price levels to remain elevated for the foreseeable future, and while pricing pressures from supply chain issues and labor shortages are expected to ease over the next year, they are not expected to disappear. Pricing power softened somewhat as contacts expressed worry that continued price increases would drive demand downward. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were unchanged in December at 3.6 percent. Year-ahead expectations increased slightly to 3.4 percent in December, up from 3.3 percent in November.
Consumer Spending and Tourism
Consumer spending remained healthy throughout the holiday season, particularly for off-price retailers. District contacts noted an increase in foot traffic compared with year-earlier levels. Auto sales remained low , and dealers expect continued supply constraints, heightened demand, and improved earnings into 2022.
Travel and hospitality contacts reported robust domestic leisure travel driven by festivals and holiday events. District cruise activity was strong, though passenger counts were lower than pre-COVID levels as cruise lines maintained self-imposed capacity limits. While there was an uptick in business travel and conventions early in the reporting period, bookings remained well below 2019 levels and contacts noted increased postponements and cancellations due to the rise in Omicron cases.
Construction and Real Estate
Housing demand in the District remained strong over the reporting period. Though slightly higher interest rates have slowed refinance mortgage activity, demand for home equity lines of credit and other mortgage products was steady. Many markets throughout the District continued to attract buyers from higher-cost markets such as the Northeast and West Coast. Demand from investors and second-home buyers continued to emerge as a significant component of the housing market. Home price appreciation continued to rise sharply, leading to escalated concerns about housing affordability over the long term. Despite significant increases in new home starts over the past year, builders continued to struggle to keep pace with demand given the widespread challenges created by supply chain disruptions. After abating earlier this year, rising material costs, particularly for lumber, have become more burdensome for builders.
Commercial real estate (CRE) activity improved, on balance, since the previous report. Contacts noted improving conditions in the office sector as more businesses reopened. After a very robust year, activity in the multifamily sector slowed due to seasonality; occupancies, however, remained at healthy levels. Contacts continued to report that competition is accelerating among CRE lenders. Smaller banks and non-bank lenders have been identified by market contacts as some of the more aggressive CRE lenders, at this juncture.
Reports on manufacturing activity were largely consistent with the previous report. Contacts noted robust demand and increased revenues, though some firms indicated that production was hindered somewhat by supply chain disruptions and high employee turnover. District manufacturers expect further strengthening in demand in 2022, but concerns over supply chain interruptions, labor shortages, and rising input costs remain.
Transportation activity remained robust over the reporting period. District ports experienced further growth in container traffic, and some reported utilizing "pop-up" container storage yards to clear congestion on port properties. Railroads noted significant increases in intermodal freight and overall traffic year-to-date. However, terminal dwell times lengthened, and rail contacts cited a deterioration in service delivery amid crew shortages and a dearth of conductors. Air cargo contacts noted increased demand as ecommerce shipments surged.
Banking and Finance
Conditions at Sixth District financial institutions remained steady over the reporting period. Loan growth trended downward amid renewed uncertainties about the course of the pandemic and growing underwriting competition from nonbank lenders. Deposit levels declined slightly but remained elevated. Financial institutions continued to hold higher balances in both cash accounts and securities portfolios. Asset quality remained healthy without any notable increases in nonperforming loans or charge-offs. Increased earnings have been driven by lower loan loss provision expenses and reductions in noninterest expenses, though margin pressures persisted due to the low interest rate environment.
Activity across energy sectors held steady or grew slightly over the reporting period. Chemical manufacturing and petroleum refining picked up across the region; however, contacts continued to report supply chain bottlenecks for various inputs, constraining some chemical production. Utilities industry contacts noted sustained growth in commercial, residential, and industrial business lines. Contacts also continued to report significant investments in renewable energy development and production, primarily in solar, wind, and carbon capture technologies.
Agricultural conditions remained mixed. Parts of the District experienced unusually dry conditions. The December production forecast for Florida's orange crop was down from last year's production while the grape-fruit forecast was unchanged from last year's production. The USDA reported year-over-year prices paid to farmers in November were up for corn, cotton, rice, soybeans, cattle, broilers, and eggs but down for milk. On a month-over-month basis, prices were up for corn, cotton, rice, soybeans, cattle, broilers, and milk, but down for eggs.
For more information about District economic conditions visit: www.frbatlanta.org/economy‐matters/regional‐economics