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Beige Book Report: Atlanta

December 5, 2018

Summary of Economic Activity
Reports from Sixth District business contacts described economic conditions as expanding at a moderate pace since the previous report. The majority of contacts are optimistic and expect the pace to continue for the remainder of the year. The labor market remained tight amid increasing reports of wage pressures. Firms continued to note rising nonlabor costs, and several contacts indicated having the ability to pass along the increases. Retailers, including automobile dealers, cited slightly higher sales over the reporting period. Reports from the hospitality sector were positive across most parts of the District. Contacts reported that residential real estate market activity was subdued, though commercial real estate activity remained robust. Manufacturers reported robust levels of new orders and production. Bankers cited that financial conditions were steady since the previous report.

Employment and Wages
Broadly, employee retention efforts remained a dominant labor market theme among business contacts. Firms continued to engage in internal programs and marketing initiatives to promote culture, build loyalty, and create a positive environment for workers. Several business contacts, especially those searching for truck drivers, construction laborers, low-skill workers, and information technology professionals, continued to report that labor market tightening impeded their ability to grow. Contacts shared that driver shortages caused supply chain delays and negatively affected their ability to meet customers' demands. Employers encountered some tightening for other positions and business areas, however some contacts expressed a willingness to wait for the right person rather than pay more, since they do not believe that higher pay will guarantee a higher quality worker. Hurricane Michael reduced employment among firms in northwest Florida, and several businesses have not returned to pre-hurricane employment levels.

Overall, employers shared that wage increases rose at either the same or an increased pace compared with the previous year, around 3-4 percent on average. A number of contacts mentioned that recent announcements from large national firms to increase starting wages for workers at the lower end of the pay scale have created broad pressures to raise pay for these workers across the region, particularly among hospitality and retail employers. Several contacts pointed out that overall compensation costs were expected to increase at a slightly faster pace in 2019.

Prices
Nonlabor costs continued to rise, according to reports from businesses across the District. Similar to the previous report, some price increases were noted as being passed along with no significant protest. Some contacts reported rising trucking rates and expressed concern that continued price escalations related to tariffs could impact future demand. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 2.2 percent in October. Survey respondents indicated they expect unit costs to rise 2.3 percent over the next twelve months.

Consumer Spending and Tourism
Since the previous report, District retailers indicated that sales levels rose slightly. The outlook among retailers regarding the upcoming holiday season was optimistic with contacts expecting higher sales levels than last year. Automobile dealers noted a slight increase in the momentum of auto sales.

District tourism and hospitality contacts reported that domestic travel was strong while the pace of growth in group and convention travel softened since the last report. On balance, demand for hotel rooms in the District remained robust while room rates decreased. Contacts were optimistic about demand in 2019 although they anticipate the pace of growth to slow.

Construction and Real Estate
On balance, housing activity continued to grow, albeit at a measured pace. Year-over-year new home sales in many District markets were up slightly, and existing home sales either moderated or declined as interest rates rose and inventory levels remained low. Upward pressure on home prices persisted but at a moderate pace. New home construction throughout the District continued to lag behind housing demand and was concentrated in higher price points within prime/high demand submarkets. Homebuilders indicated that rising land, labor, and material costs continued to push new home prices higher.

District commercial real estate activity remained strong across most of the region during the reporting period. Vacancy rates continued to decline modestly, though contacts reported some slower-paced leasing dynamics at some suburban retail properties. Industrial leasing was especially robust and generally was greater than the heightened amount of new construction completions across the District. Multifamily occupancy rates rose as demand outpaced supply.

Manufacturing
Manufacturing contacts continued to report solid demand and healthy overall business conditions since the previous reporting period. New orders and production levels remained robust at most firms, with the exception of those along the Gulf Coast that were affected by Hurricane Michael. Supply delivery times were reported to be getting slightly shorter, while input prices continued to rise. Expectations for future production levels increased from the previous period, with almost half of contacts expecting higher production over the next six months.

Transportation
District transportation contacts indicated that demand was generally consistent with the previous reporting period. Total rail traffic, including intermodal, was up marginally over year earlier levels. Trucking and logistics contacts reported continued growth in e-commerce shipments. District ports noted a strengthening in container activity related to inventory building for the peak buying season, along with increases in breakbulk, automotive, and heavy equipment cargo. While one District port in the path of Hurricane Michael experienced some operational disruptions, most transportation firms noted little to no negative impact on the movement of cargo due to the storm.

Banking and Finance
Conditions at financial institutions were stable. Earnings improved, driven by higher interest rates that enhanced the net interest margin at most institutions. Credit quality generally remained positive, however some District institutions experienced an increase in bankcard delinquencies. Financial institutions continued to loosen underwriting standards due to slowing demand for credit and increased competition, particularly in the residential mortgage and the commercial lending portfolios.

Energy
Overall, activity in the District's energy sector picked up since the previous reporting period. Oil and gas production continued to increase. Expenditures on power generation projects across the District continued to rise, largely attributed to increased industrial demand. Contacts reported several recently initiated, approved, or planned capital projects across the region to expand capacity among chemical producers and power plants, and to construct oil and gas storage terminals and pipelines for takeaway capacity to and from the Gulf Coast of Louisiana. Gulf of Mexico drilling rig shut-ins due to Hurricane Michael were described as minimal; contacts estimated the loss of crude oil production at approximately two million barrels or about $140 million.

Agriculture
Agriculture conditions across the District softened. In early October, Hurricane Michael caused significant wind and rain damage to agriculture production in the Florida panhandle, south Alabama, and south Georgia. Products affected included cotton, pecans, peanuts, fruit and specialty crops, timber, livestock, poultry, and greenhouse and nursery products. In spite of Hurricane Michael, cotton harvesting in Alabama and Georgia progressed close to their five-year averages, but with significant deterioration in conditions, especially in Georgia. The District's soybean and peanut harvests were ahead of their five-year averages. Year-over-year prices paid to farmers in September were up for corn, cotton, rice, and beef, while soybean, eggs, and broiler prices were down.

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