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Beige Book Report: Atlanta

March 6, 2019

Summary of Economic Activity
Sixth District business contacts reported that economic activity continued to advance at a moderate pace over the reporting period and the outlook among contacts remained positive. Labor markets continued to tighten, and some firms noted relocating certain segments of their operations to gain access to larger pools of talent. On balance, firms noted growth in wages since the previous report, along with mounting pressure in a number of hard-to-fill positions. Nonlabor costs continued to rise, particularly for those goods and services impacted by tariffs. Retail sales growth was flat over the reporting period, and vehicle sales were slow. Reports from the hospitality sector were upbeat, with solid growth in business and leisure travel over year earlier levels. The slowdown in residential real estate activity noted in the last report continued, and commercial real estate activity remained steady. Manufacturers reported that new orders were flat; however, production levels increased. Banking contacts indicated that conditions remained stable.

Employment and Wages
Business contacts continued to cite challenges finding and retaining workers, particularly in information technology, construction, food services, medical, finance, manufacturing, and transportation. In response to these challenges, some firms shared that they were considering or had already taken steps to relocate portions of their business, mainly information technology, finance and accounting, customer service, and upper management positions, to larger urban locations with greater access to talent. Several contacts continued to report that their inability to find workers hindered their firm’s ability to grow and meet rising demand. Consequently, many cited a renewed focus on productivity enhancements using existing and/or new technology and automated systems.

On average, firms across the District reported wage increases from 2 1/2 to 4 percent. Increases were greater and pressure was described as more acute in urban areas and/or among hard-to-fill positions, including jobs in nursing and other medical fields, engineering, manufacturing, retail, hospitality, and banking and finance. Similar to previous reports, many contacts shared that even after increasing wages, they struggled to attract enough qualified candidates, and thus indicated expanding non-wage offerings, such as additional vacation time, flexible work arrangements, and/or reduced hours for full-time, exempt employees.

Prices
Increases in some nonlabor input costs continued to be reported by business contacts. Rising costs were predominately noted in goods and services impacted by tariffs, as well as in transportation and construction. The Atlanta Fed’s Business Inflation Expectations survey showed year-over-year unit costs were up 1.9 percent in February. Survey respondents indicated they expect unit costs to rise 1.9 percent over the next twelve months.

Consumer Spending and Tourism
District retailers reported flat sales growth since the previous report. Automotive dealers reported a slow start to 2019. Retail and automotive contacts expect modest sales growth, on a year-over-year basis, for 2019.

On balance, travel and tourism contacts reported a strong start to 2019 with solid growth in business and leisure travel compared to the same time period last year. The outlook for activity remains positive with healthy advance bookings reported through the first quarter of this year.

Construction and Real Estate
Although affordability remains a challenge for the housing sector, the recent moderation in interest rates alleviated some pressure and led to increasing optimism among sellers and homebuilders as they head into the peak selling season. Existing home sales in 2018 were flat or down in many markets throughout the District compared to the previous year. Inventory levels, though increasing on a year-over-year basis, remained low in most markets. Home price appreciation moderated in many markets as declining sales and rising inventory levels led to less upward pressure on prices.

Commercial real estate leasing and sales activity remained steady across most District markets. Overall, rents grew and vacancies trended downward at a modest pace. Strength remained in the industrial, multifamily, and medical sectors. Office market contacts reported overall persistent strength; however, higher levels of employee densification and greater deliveries of space appeared to be creating pockets of slowing in some local markets.

Manufacturing
Manufacturing contacts described overall business conditions as relatively healthy during the reporting period. While new order levels were somewhat flat, production levels were reported to have increased, along with a small rise in finished inventories. Purchasing managers reported no significant change in wait times for supply deliveries. Expectations for future production levels remained strong, with over one-half of contacts expecting higher production over the next six months.

Transportation
District transportation firms cited mixed results since the previous report. Railroad contacts noted that total rail traffic was up modestly compared with year-earlier levels; however, intermodal shipments declined slightly. Port contacts cited substantial increases in container traffic, bulk and break bulk cargo, and autos. Trucking activity slowed since the previous report, in line with expectations. Most transportation contacts in the District expect higher demand in 2019.

Banking and Finance
Financial institutions remained healthy due in part to sustained earnings growth and a relatively benign credit environment. Increasing interest rates had a positive impact on earnings though funding costs put some pressure on net interest margins for a number of institutions. Loan growth was stable even as overall asset growth slowed due to a declining securities portfolio. Overall, credit quality metrics remained positive with charge-offs and nonaccrual loans still near historical lows.

Energy
New discoveries in the Gulf of Mexico contributed to increased activity in offshore exploration and production. Exports of crude continued to accelerate. Pipeline construction and operations remained strong across the District, particularly among firms planning to export crude from Louisiana ports. Chemical and petrochemical industry contacts reported steady activity and slightly higher levels of capacity utilization over the previous reporting period. While some new refinery and chemical projects were announced, many contacts indicated that activity was in a lull during the first quarter and was expected to pick up later in the year. From the utilities perspective, cold weather created a surge of demand among residential and commercial customers.

Agriculture
Agricultural conditions across the District were mixed. Recent reports showed that most of the District was drought-free, with the exception of small areas in south Florida and coastal Louisiana where conditions were abnormally dry. The February forecast for Florida's orange crops was unchanged from the previous month but remained significantly ahead of last year’s production. Since November, weekly cash prices were up for corn, soybeans, beef and broilers, while cotton and rice prices were down.

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