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Beige Book Report: Atlanta

October 18, 2017

Summary of Economic Activity
Aside from hurricane effects, Sixth District business contacts described economic conditions as improving at a modest pace from mid-August through September. The outlook among firms remained optimistic with the majority of contacts expecting growth to be slightly above current levels for the remainder of the year. Most firms continued to cite labor market tightness, but with few reports of wage pressures. Overall input cost pressures were muted. Most merchants cited steady sales growth since the previous reporting period; however, automobile dealers continued to note softening sales. Hospitality, energy, and agriculture contacts reported that activity was greatly affected by Hurricane Irma. Residential real estate contacts suggested that home sales and prices were slightly ahead of last year's levels. Manufacturers indicated that new orders and production increased. Bankers noted that credit continued to be available.

Employment and Wages
District business contacts reported that job growth was steady since the previous report, though challenges filling construction, information technology, finance, transportation, and nursing positions persisted. Energy sector contacts experienced ongoing difficulties filling skilled craft positions. Firms continued to develop and utilize internal and external training programs to help produce qualified workers. Commercial and residential construction industry contacts further indicated that labor shortages were restraining growth. Businesses continued to engage in partnerships with the educational and workforce development community to fill specific industry or individual firms' skill gaps. Broadly, businesses continued to use non-wage mechanisms to attract and retain workers. While it is early to gauge the impact of Hurricanes Harvey and Irma on southeastern labor markets, some contacts expect the hospitality, retail, and construction industries to be the most impacted, particularly in Florida and Louisiana.

Wage growth remained steady, with the exception of continued wage pressures for some high-skilled positions and increased reports of rising wages in the construction industry. Business plans for future compensation, on balance, continued to be reported as modest for the coming year.

Firms reported that overall input costs were mostly flat. Although there were reports of limited pricing power, most businesses have been able to pass along commodity input cost increases. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.7 percent in September. Survey respondents also remarked that they expect unit costs to rise 1.9 percent over the next twelve months. Early reports from Florida construction contacts indicated that costs, which were already rising, were expected to increase significantly due to hurricane rebuilding efforts.

Consumer Spending and Tourism
Overall, retail sales growth was unchanged since the last report, although contacts in Florida reported an increase in retail sales of building materials in preparation for and following Hurricane Irma. Auto dealers continued to report a slow-down in momentum of auto sales compared to a year ago, though some expect sales to increase from replacement activity due to the hurricanes.

Tourism in Florida was heavily impacted by Hurricane Irma, although it is too soon to gauge the full extent of the impact. Hotels and restaurants remained closed due to power outages and downed trees for up to three weeks on the west coast of Florida while the remainder of the state was functional within a week. Reports from the Florida Keys indicated that some major hotels and resorts may take up to six months to rebuild. Georgia and Louisiana experienced an uptick in visitors displaced from Florida. In spite of hurricane related set backs, contacts from the tourism and hospitality sector remain optimistic for the remainder of the year.

Construction and Real Estate
Reports from residential real estate contacts in August signaled modest growth prior to Hurricane Irma's landfall. Builders said construction activity was slightly up from the year-ago level. Many brokers and builders indicated home sales were up slightly relative to the year-ago level. The majority of contacts noted that buyer traffic was flat to slightly down and inventory levels were down from the year-ago level. Both builders and brokers continued to report gains in home prices. Many builders expect home sales to be flat over the next three months relative to the same period last year, while the majority of brokers anticipate slightly higher sales. Most builders expect that construction activity will match or marginally surpass the current pace over the next three months.

Many commercial real estate contacts reported improvements in demand that resulted in rent growth, but cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. The majority of commercial contractors indicated that the pace of nonresidential construction activity had increased from one year ago; most reported healthy backlogs. Several reports noted that the pace of multifamily construction matched or exceeded the year-ago level. Commercial construction contacts' expectations for the pace of nonresidential construction were mixed, while their outlook for the pace of multifamily construction leveled off. Florida contacts suggested that construction activity will increase significantly due to hurricane rebuilding efforts.

Manufacturing contacts indicated that the pace of overall activity increased since the last report. Purchasing managers noted a rise in new orders and production levels, as well as an increase in the pace of hiring. Supplier delivery times were reported as getting longer and finished inventory levels increased somewhat. The overall outlook was relatively unchanged from the previous report, with close to half of firms surveyed expecting higher production over the next six months.

Transportation firms reported varying levels of activity since the previous report. Ports experienced continued growth in container trade and roll-on/roll-off cargo. Railroads reported that total rail traffic was down compared with the same period last year as shipments of grain, farm products, petroleum and petroleum products, and non-metallic minerals saw double-digit declines. Intermodal traffic, however, was up moderately. Trucking contacts cited considerable increases in freight volume month-over-month. While Hurricane Irma caused temporary disruptions for Florida transportation contacts, most reported a return to normalcy within a week after the storm.

Banking and Finance
Credit remained readily available for most qualified borrowers, although some small and minority-owned businesses experienced difficulty obtaining credit. Liquidity was plentiful, but competition restrained lending at some banks. Auto dealer contacts described a slowdown in auto lending due to slowing sales and rising interest rates. Credit remained widely available to businesses seeking operating and expansion capital.

Contacts indicated that inventories decreased as a result of Hurricanes Harvey and Irma. Retail demand continued to put pressure on supply to affected areas, particularly those without pipeline access. Refineries resumed production a few days after the hurricane hit. Utility companies restored power within two weeks to areas affected with the exception of significantly wind damaged locations in the Keys. Overall, contacts reported that utilities continued to experience a decline in residential and industrial sales and commercial sales remained flat.

Agriculture conditions across the District were mixed. Although damage assessments are still being made, Irma's heavy rains and high winds resulted in significant damage to Florida's agriculture industry as well as crop damage in parts of Georgia and Alabama. Tennessee's corn harvest closely tracked the five-year average. The District's cotton harvest and the soybean harvests in Mississippi and Tennessee were mostly on par with five year averages. Both the Louisiana and Mississippi rice harvests were ahead of their five-year averages. On a year-over-year basis, prices paid to farmers in August were up for corn, broilers, and eggs but were down for cotton, rice, soybeans, and beef.

For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics