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Atlanta: November 2022

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Beige Book Report: Atlanta

November 30, 2022

Summary of Economic Activity
The economy of the Sixth District grew at a tepid pace from October through mid-November. Labor market pressures eased modestly, and turnover improved somewhat. While wage pressures remained elevated, some moderation was reported. Most nonlabor cost increases slowed, but food prices rose, and freight costs remained elevated. Pricing power was mixed. Low-to-moderate income households experienced declines in financial well-being as the rising cost of living strained household budgets. Retailers reported stable demand, on balance, and new auto sales were robust. Leisure travel activity was described as healthy as compared with pre-pandemic levels, and business and convention bookings improved. Housing demand weakened and inventory levels rose. Transportation activity weakened. Deposit growth at financial institutions slowed. Damage from Hurricane Ian was widespread across southwest and central Florida with agriculture and tourism being the sectors most impacted.

Labor Markets
Labor market pressures eased modestly, but attracting and retaining talent remained a top concern for many firms. Most employers played "catch-up" to fill open positions while only a few indicated that they were hiring for growth. Finding qualified candidates was reported as nearly impossible, so firms increased investments in training new hires. Turnover eased somewhat, but employees continued to be drawn away by higher wages, advancement, and greater schedule flexibility. Labor shortages were most acute in skilled construction, childcare, education, and healthcare.

Most employers reported upward wage pressures, although several indicated that pressure had eased in recent months. Looking ahead, expectations for wage growth were mixed; some anticipate wage growth will moderate or level off as demand subsides, while others anticipate inflation, combined with continued labor market tightness, could push wage growth higher than planned. A few contacts mentioned that they will be discontinuing off-cycle increases and going back to an annual cadence.

District firms noted most nonlabor cost increases have moderated, and some costs, like lumber and steel, declined. While supply chains were reported as stabilizing, domestic freight costs remained elevated above historical norms, causing some companies to bring materials transport in-house as a way to achieve efficiencies. Food prices continued to rise due to many factors, including global supply issues resulting from the Russia/Ukraine war. Increasing labor costs were factored into final pricing by some firms. Pricing power was mixed, and many contacts noted reduced margins. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth remained unchanged at 4.1 percent, on average, in October. Firms' year-ahead inflation expectations also remained unchanged from September at 3.3 percent, on average.

Community Perspectives
Community organizations reported signs of declining consumer financial health for low-to-moderate income households in recent months. The rising cost of groceries, fuel, and rent strained household budgets, resulting in increasing demand for food pantries and rental assistance programs. Competition from all-cash buyers and low housing inventories continued to reduce already limited housing options for low-to-moderate income households. Access to affordable childcare and public transportation, particularly in rural areas, has worsened since the pandemic and remains a barrier to labor force participation. Nonprofit service providers noted an uptick in the number of clients relying on side gigs to make ends meet or as pathways to financial self-sufficiency.

Consumer Spending and Tourism
Retailers reported that aggregate consumer demand had not changed materially, on balance, since the previous report. However, low-to-moderate income consumers continued to trade down for certain goods. Some contacts noted they were beginning to see some slowing of demand by middle-income consumers. Automobile dealerships reported strong new vehicle sales as inventory levels improved.

Tourism contacts reported solid leisure travel activity as compared with 2019 levels. Business and convention travel has begun to normalize back to pre-pandemic levels. Hurricane Ian damaged hotels along beaches in southwest Florida, and uncertainty exists around when these hotels will reopen due to a lack of available labor and construction supply issues.

Construction and Real Estate
Housing demand continued to deteriorate as mortgage rates rose and affordability further declined. Existing home sales dropped sharply and inventory levels rose in most markets. Although home prices remained above year-ago levels, monthly sales price growth continued to moderate. The new home market decelerated at a faster rate, with a sharp decline in new orders and a rise in cancellations. Builders pulled back on starts but the inventory pipeline remained elevated, with the bulk of units to be delivered through the first quarter of 2023.

Commercial real estate (CRE) contacts reported healthy but slowing market conditions; however, industrial real estate appeared robust. Contacts voiced concerns over a future slowdown that could further erode activity levels. The slowing in activity was consistently associated with lower-tier office, luxury multifamily, and owner-operator retail driven by more restaurant closings. Contacts reported concerns about declining CRE values as the bid-ask spread widened. Contacts cited more instances of slowing/negative rent growth, rising expenses, and slowing/negative net operating income growth.

Transportation activity declined since the previous report. Inland waterway freight movements were impeded by low water levels on the Mississippi River. Air cargo contacts noted a dip in revenue year over year, which was attributed to inflation curbing consumer demand for goods. District transportation contacts noted minimal impact to supply chains from Hurricane Ian.

Banking and Finance
Activity slowed at financial institutions, particularly deposit growth. Banks reported increases in other types of funding besides traditional deposits, such as brokered deposits and borrowings from the Federal Home Loan Bank. Unrealized losses in securities prompting some institutions to reclassify securities from available-for-sale to held-to-maturity. Still, except for farmland loans, all major loan portfolios grew. Asset quality metrics were stable, although the level of nonperforming assets increased slightly. Financial institutions increased their provision for credit losses over concerns about a potential economic downturn. Improved earnings were driven by a higher net interest margin offsetting lower noninterest fee income.

Oil and gas contacts reported strong demand amid ongoing supply constraints. Crude oil production rose, and refiners maintained high utilization rates. Contacts noted that the region faced challenges with low supplies of diesel fuel, as high prices in the Northeast limited pipeline deliveries to the Southeast. Several firms reported growing investments in energy production, as well as increasing renewable energy project backlogs, including investment in hydrogen, carbon capture, renewable natural gas, and wind-energy development projects. Utility providers reported increased power usage across all customers.

Agricultural conditions remained mixed. Cotton growers reported further softening of demand from textile manufacturers. Tariffs imposed on rice from India kept demand for domestic rice strong. Demand for chicken and cattle exceeded supply. In Florida, Hurricane Ian destroyed several herds of livestock and numerous crops, and citrus industry contacts expect damage to trees from the storm will exacerbate already strained production from disease in the coming years.

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