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Beige Book Report: Atlanta

October 24, 2018

Summary of Economic Activity
Reports from Sixth District business contacts indicated that economic activity expanded at a moderate pace from mid-August through September, and most expect the pace to continue through the last quarter of the year. The labor market remained tight, and reports of wage pressures increased. Firms continued to note increasing nonlabor costs and a growing number of contacts reported the ability to pass along those increases. Retailers, including automobile dealers, cited slightly higher sales since the previous report. Tourism activity exceeded expectations. Contacts reported that residential real estate market activity expanded at a modest pace, and commercial real estate activity was robust. Manufacturing activity was solid with purchasing managers noting increased new orders and production since the previous report. Bankers cited that activity was healthy, on balance.

Employment and Wages
While business contacts across the District reported increasing staffing levels, firms continued to cite that tightening labor markets, particularly among low-skill/hourly jobs, were restraining business activity. Constraints to growth were especially acute in construction, transportation, and manufacturing; while some contacts in food services also indicated turning down new business, reducing shifts, or occasional fast food store closures. Contrastingly, contacts continued to note that technological advances in agricultural, financial, and manufacturing processes had reduced the number of workers needed.

A growing number of firms over the reporting period experienced an uptick in merit increases for workers; several contacts reported average merit raises in the 3 to 3.5 percent range. Many continued to mention that rising labor costs were a challenge, leading some firms to expand their geographical search for workers, relocate operations to lower cost labor markets, outsource work domestically and/or abroad, or "wait it out" by not filling certain positions.

Prices
Firms across the District continued to report rising nonlabor input costs, with some ability to pass along price increases. As noted in the previous report, anticipation of rising costs related to tariffs contributed to vendor price increases for commodities. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 2.0 percent in September. Survey respondents indicated they expect unit costs to rise 2.2 percent over the next twelve months.

Consumer Spending and Tourism
District retailers reported a slight increase in sales levels since the last report. Some contacts noted that tourist related retail sales were stronger than expected over the last two months. Automotive dealers reported an uptick in the level of sales of small SUVs and light trucks in September compared to a year ago.

Tourism and hospitality contacts in the District reported higher than expected tourism activity since the previous report. Hotel occupancy and average daily rates were higher than expected in tourist destination cities in Florida, Georgia, and Louisiana. Year-to-date Mississippi casino gaming revenue increased compared to the same time period last year. District contacts remain optimistic about activity in the fourth quarter.

Construction and Real Estate
On balance, reports from District residential real estate contacts indicated decelerating, but still positive, growth. Many builders reported that construction activity was up from the year-ago level. Lot and land availability remain constraints on building activity, but contacts noted that land costs have plateaued. Contacts characterized buyer traffic as steady, but with a low rate of conversion to sales. District builders expect home sales activity to remain at current levels for the next few months.

Many District commercial real estate contacts noted continued strong demand. The majority of commercial contractors indicated that, on balance, the pace of nonresidential construction at least matched the year-ago level. Most contacts reported a healthy pipeline of activity. Industrial contacts noted that backlogs were steady rather than growing and retail contacts described activity as stable. Contacts expressed concern that material price uncertainty presents an ongoing challenge to bidding and fulfilling projects. The outlook for nonresidential and multifamily construction across the District remained positive though uncertain, with the majority of contacts anticipating activity to match or exceed the current level.

Manufacturing
Manufacturing firms reported that overall business activity was solid since the previous report. Most contacts indicated that new orders and production levels were increasing at a healthy pace. Purchasing managers cited extended delivery times for supply orders and continued upward pressure on input prices. Expectations for future production levels increased slightly from the previous period, with a little more than one-third of contacts expecting higher production over the next six months.

Transportation
On balance, transportation activity across the District was little changed since the previous report. District ports continued to report considerable growth in freight. District railroads noted year-over-year increases in total traffic, led by substantial increases in the volumes of petroleum and petroleum products, pulp and paper products, aggregates and metallic ores; these increases were partially offset by declines in non-metallic minerals (including phosphates) and coke. Year to date, total railroad activity was up slightly over last year. Freight forwarders reported significant capital investments in facilities, aircrafts, and fleets as capacity constraints mounted due to steady increases in domestic and international volume. While noting some challenges, transportation contacts indicated no significant disruptions in the movement of freight as a result of changes in trade policy.

Banking and Finance
Conditions at financial institutions remained healthy. Earnings continued to grow as higher interest rates drove improvement in net interest margins. Credit quality metrics remained positive with charge-offs and nonaccruals still at historic lows. However, financial institutions were reportedly starting to loosen underwriting standards due to slowing demand for credit and increased competition. Contacts indicated that financial institutions were relying more on borrowings and noncore deposits to fund asset growth. In addition, competition for core deposits was fueling an increase in mergers and acquisitions.

Energy
Onshore crude oil and natural gas production continued to accelerate, spurring exports of both products from Gulf Coast terminals. Refinery utilization rates remained high and stable from the previous reporting period. Utilities contacts reported that while residential and commercial demand for power was flat to slightly down, industrial demand was strong. Regarding recently imposed tariffs, many energy contacts shared that their businesses had responded by reorganizing supply chains. Technological advancement in areas such as robotics and global monitoring of control centers and pipelines continued to enhance efficiencies for the District's energy sector. Contacts continued to point out that business growth was constrained by inadequate supply of truck drivers and highly specialized tradespeople.

Agriculture
Agriculture conditions across the District remained mixed. By late September, most of the District was drought-free. District corn, soybean, cotton, and peanut harvests were close to their five-year averages although by late September, significant rain in Tennessee resulted in some crop damage and delays in harvesting. Year-over-year prices paid to farmers in August were up for corn, cotton, rice, and eggs, while soybean, beef, and broiler prices were down. Contacts remained concerned about tariffs and trade conflicts although there was some optimism concerning the newly agreed upon United States-Mexico-Canada Agreement. Recent reports indicated cropland values in the District rose from 2017 to 2018 with the exception of Florida where cropland values were flat.

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