Beige Book Report: Atlanta
April 19, 2023
Summary of Economic Activity
The Sixth District economy grew at a modest pace from mid-February through March. Labor markets improved, and wage pressures diminished slightly amid increasing labor availability. Some nonlabor costs such as shipping, eased, while others, like construction materials, remained volatile. Retail sales softened, but demand for new autos was robust. Tourism activity remained healthy. Demand for housing improved amidst lower mortgage interest rates and declining home prices. Demand for commercial real estate remained mixed. Transportation activity was unchanged, on balance, from the previous report. Manufacturing activity was mixed with consumer confidence cited as a risk. Loan growth at banks remained strong despite concerns about liquidity. Activity in the energy sector was mostly healthy. Agriculture conditions remained mixed.
Labor Markets
Labor market conditions continued to improve. Contacts noted that many positions were easier to fill, and most indicated retention had improved. However, businesses continued to cite challenges including acute shortages of various positions (for example, in hospitality, accounting and transportation), confronting an aging labor force, and facing sustained demand for flexible work arrangements by employees. Most firms have been hiring to back-fill open positions while a small number were hiring to grow business. Several firms noted efforts to move away from underperforming lines of business by downsizing through both attrition and layoffs while staffing up more profitable lines. Contacts noted turning to automation to fill repetitive, understaffed roles, and some have begun to leverage the use of artificial intelligence in lieu of hiring for certain professional positions.
Most contacts noted some relief from wage pressures and expressed certainty that wage growth would moderate further this year.
Prices
Contacts reported continued improvement in supply chain issues and shipping capacity, which has helped ease transportation cost pressures. Even though contracts still carried elevated escalation or contingency clauses, some degradation in pricing power at the wholesale level was reported. Buyers were reportedly winning more concessions compared to the last two years of a take-it-or-lose-it price environment. However, various other nonlabor costs like food inputs and construction materials saw continued volatility and this, coupled with elevated labor costs, kept firms from passing easing cost pressures on to customers. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth at 3.8 percent, on average, in March, up significantly from 3.5 percent in February. Firms' year-ahead inflation expectations increased to 3.1 percent, on average in March, up significantly from 2.9 percent in February.
Consumer Spending and Tourism
Retail sales softened over the reporting period but remained above pre-pandemic levels. Retailers continued to report that inflationary pressures have caused lower-income consumers to be more selective with discretionary spending. However, automobile dealers reported strong demand for new vehicles as inventory levels improved. Contacts were cautiously optimistic for the remainder of the year in spite of continued inflationary pressures and rising interest rates.
Travel and tourism activity was little changed from the previous report. Demand for leisure travel remained healthy and was described as normalizing from unsustainably high year-earlier levels. Business travel continued to recover. Hotel average daily rates remained above pre-pandemic levels and travelers' spending on experiences continued to be robust.
Construction and Real Estate
Though still weaker than a year ago, housing demand throughout most of the District was boosted by lower mortgage interest rates and continued declines in home prices. A higher percentage of homes have sold below asking price and median home prices in many metro areas declined from peak levels reached in 2022. This, combined with lower interest rates, has led to a steady improvement in home ownership affordability and increased demand for housing. Activity has been stronger in the entry-level price points compared to more high-end homes. However, inventory remained near historic lows in most markets. Cancellations in the new home market moderated and some homebuilders have increased speculative home inventory.
Commercial real estate (CRE) conditions were mixed. The industrial sector remained healthy, while office, multifamily, and some segments of retail slowed. An increasing number of contacts reported concerns about rising costs outpacing rent increases. More employers requiring staff to return to the office has helped stabilize some segments of the market; however, a significant amount of available sublease space is expected to create headwinds. A rising number of contacts mentioned concerns about the availability of financing as some banks reduced funding commitments amid weaker lending from larger financial and non-bank institutions. Concerns over declining CRE values accelerated.
Transportation
Transportation activity was largely consistent with the previous report. Ports continued to see a slowing in container trade, though volumes remained above pre-pandemic levels. Shipments of autos and heavy machinery through District ports increased. Railroads reported further declines in overall freight shipments. Air cargo contacts noted significant year-over-year volume declines. Truck capacity remained readily available, and some trucking contacts noted expectations for an improvement in volumes later this year.
Manufacturing
Some manufacturers reported significant slowing in activity, especially firms producing inputs for residential construction, where declines were attributed to elevated mortgage rates and persistently high construction costs. Lead times and supplier delivery times improved, and supply chains were characterized as normalizing. Auto manufacturers noted strong demand; however, consumer confidence was cited as a risk to the outlook.
Banking and Finance
Liquidity pressures persisted for some District financial institutions. Banking contacts reported that a limited number of customers expressed concerns about recent bank failures and their level of uninsured deposits held at a single institution; however, banks have not experienced a large outflow of deposits. Unrealized losses remain elevated, limiting the ability to sell securities for liquidity without negatively impacting capital. Despite concerns about liquidity, banks indicated loan growth remained solid over the reporting period.
Energy
Energy contacts noted robust activity in exploration and production, crude oil refining, power infrastructure projects, liquefied natural gas, and renewable energy projects. Strong global demand and federal dollars for decarbonization from the Inflation Reduction Act were cited as factors influencing activity strength. Chemical manufacturers reported softening in the chemicals space, largely for housing sector inputs. Utility providers also reported some slowing in industrial segments tied to housing. Commercial and residential utility segments, however, remained strong.
Agriculture
Agricultural conditions were mixed. Domestic supplies of chicken exceeded demand as the Avian Flu limited exports. However, foreign demand for poultry improved as some countries loosened import regulations. Demand for eggs exceeded supply but softened in response to elevated prices. Cattle supply remained low, and beef producers expressed concerns that falling chicken prices may cause consumers to substitute chicken for beef. Demand for cotton and soybeans fell from already low levels. Contacts expect reduced plantings of cotton this year as discretionary spending softens. Contacts noted continued supply chain improvements.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.aspx