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Beige Book Report: Atlanta
June 1, 2022
Summary of Economic Activity
Economic activity in the Sixth District expanded at a modest pace from April through mid-May. Labor market tightness and wage pressures continued for some. Most nonlabor costs rose, and firms' pricing power was sustained. Retail sales softened somewhat, and auto sales were down from year-earlier levels. Leisure travel was robust, and business travel and convention bookings picked up. Demand for housing slowed slightly as rates picked up, inventory levels remained low, and home prices remained elevated. Commercial real estate activity remained mixed. Manufacturing activity was strong. Conditions at financial institutions were mixed as lending activity strengthened and deposit levels declined.
Most contacts continued to report tight labor market conditions. Turnover rates remained elevated. Reports on the pool of candidates for open positions were mixed. Among professional positions, the availability of candidates improved by most accounts; however, for firms seeking to fill skilled trades, manufacturing, and hourly service jobs, talent remained in short supply. Businesses continued to respond to labor constraints in a variety of ways including increasing wages, bonuses, and benefits; offering scheduling flexibility; curtailing capacity; offshoring jobs; and slowing growth. Many noted the speed of hiring had increased dramatically across all position types and wage levels to secure talent; strong salary offers were typically in-hand at the time of the interview to offset counteroffers from existing and other employers.
Expectations about faster wage increases remained mixed. Some firms anticipate wage growth will increase this year across all jobs, while others plan to be more targeted with raises, and yet some expect growth will slow a bit.
Reports of cost increases were widespread over the reporting period, including the cost of freight, labor, nonlabor inputs, and food. Supply chain constraints continued to plague firms, and some noted a shift to shipping freight by air, though it was much more costly. For some businesses, the volatility of the current pricing environment has impacted the variety of products available and reduced contract negotiations to shorter terms with more "cost plus" conditions. Margins largely remained at record highs for many firms as price increases were met with little resistance; however, several contacts noted a slight dampening of demand or consumers "trading down" to second tier products. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth was relatively unchanged at 4.2 percent, on average, in May. Firms' year-ahead inflation expectations also remained relatively unchanged at 3.7 percent, on average.
Consumer Spending and Tourism
District retailers reported some softening in unit sales and a shift in discretionary spending since the previous report. Contacts noted that some customers began foregoing discretionary spending to cover the rising costs of rent, food, and fuel. Though demand for luxury goods continued to hold up, demand for items such as home decor slowed among lower- and middle-income customers. Year-over-year automotive unit sales remained well below 2021 levels amid persistently low inventories.
Demand for leisure travel remained robust and hospitality contacts reported strong advanced bookings through the summer. Consumer spending at tourism destinations was described as having returned to (or in some cases, surpassed) pre-pandemic levels. Business travel and convention bookings continued to improve.
Construction and Real Estate
Home sales throughout the District slowed somewhat as housing prices and mortgage interest rates rose. Inventory levels remained low in most areas, and homes new to the market continued to sell quickly. On balance, home price acceleration continued, as markets like Nashville, Tampa, and Atlanta experienced very strong growth over the past year. Declining homeowner affordability remained a major concern among market participants. Contacts indicated that, although buyer interest remained robust in many markets, higher prices and rising interest rates resulted in a shrinking pool of eligible buyers, and contract cancelations slightly increased as fewer buyers qualified for mortgage loans. Although housing starts rose, builders indicated that supply chain disruptions remained a challenge.
District commercial real estate (CRE) conditions remained mixed. Contacts reported continued robust activity in the multifamily and industrial sectors. Lower-tier office demand was identified as cooling somewhat. Employers' return-to-office stances appeared to be mitigating some of the downward trend in the office sector; however, heightened levels of sublease space remained an impediment to recovery. While overall transaction levels were healthy, CRE contacts reported shrinking pools of buyers, more instances of buyers seeking greater concessions, and price declines in some property sectors.
Manufacturing activity in the District remained strong. However, some contacts noted an inability to meet demand due to staffing constraints and shortfalls of supplies, notably steel sourced from Ukraine. Several manufacturers reported spreading supply purchases across multiple sources to alleviate supply chain constraints and implementing advance supply ordering to avoid depletion of parts inventories. Half of manufacturing respondents participating in the Atlanta Fed's Business Inflation Expectations Survey reported increasing capacity by adding staff or shifts to meet demand, while others simply turned away customers.
Transportation activity remained mixed. Inland barge companies reported increased shipments of refined petroleum products, chemicals, and aggregates. District ports experienced further growth in container volumes. In the spot market, freight brokers reported a slight pullback in the van sector, which was attributed partially to a shift from the purchasing of goods to services by consumers; demand for flatbeds was steady as housing and construction activity remained high. Despite continued year-over-year declines in freight volumes, railroad contacts reported double-digit increases in revenue due to pricing gains. While most transportation contacts expect activity to remain steady over the next 6-12 months, some voiced concerns that elevated inflation and higher fuel prices could slow activity in the sector.
Banking and Finance
Conditions at District financial institutions were mixed. Bankers reported higher loan growth, a decline in deposits, and a shift in the interest rate environment. Consumer, commercial, and industrial lending strengthened, but construction loans fell. Residential mortgage lending moderated due to a combination of low housing inventory and a move toward higher interest rates. Deposits declined further, leading to increased short-term borrowings among financial institutions. Provisions for credit losses increased as delinquencies rose slightly but remained below historical norms.
Energy contacts reported that demand for crude oil fell over the reporting period. At the same time, oil production picked up, helping global crude markets withstand the loss of Russian supplies. Still, for many producers, increasing production remained a challenge as labor shortages and supply chain bottlenecks inhibited access to equipment and raw materials for drilling. Refinery utilization remained strong. Demand for some chemical and petrochemical products declined. Utility contacts reported that rising natural gas prices are expected to result in higher utility bills for consumers. Across utility segments, commercial and industrial activity were up, while residential activity was flat, the latter attributed to customer growth being offset by falling residential usage as customers returned to work in offices space. Investment in renewables remained robust, particularly in solar and offshore wind.
Agricultural conditions remained mixed. Most of the District remained drought free. On a month-over-month basis, the May production forecast for Florida's orange and grapefruit crops were below last year's production. The USDA reported year-over-year prices paid to farmers were up for cattle, corn, cotton, eggs, milk, soybeans, rice, and broilers. On a month-over-month basis, prices increased slightly for cattle, corn, cotton, boilers, milk, and soybeans, but decreased for eggs; rice was unchanged.
For more information about District economic conditions visit: www.atlantafed.org/economy‐matters/regional‐economics