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Beige Book Report: Atlanta

June 5, 2019

Summary of Economic Activity
Sixth District business contacts reported that economic activity continued at a modest pace from April through mid-May. The outlook among contacts remains optimistic as most firms expect modest growth to continue over the next three to six months. District firms continued to report labor market tightness. Although overall wage growth remained moderate, pressure was noted among low-skill, trucking, construction, technology, and medical positions. Most nonlabor input cost pressures remained subdued. On balance, District merchants reported steady sales levels since the previous report. The tourism sector continued to experience solid activity. According to residential real estate contacts, home sales were up and prices were flat compared with a year ago. Commercial real estate contacts indicated leasing and sales activity continued to advance across most parts of the District. Manufacturing purchasing managers cited increases in new orders and production. Banking conditions remained steady.

Employment and Wages
Similar to the previous report, many District firms added to headcounts; however, a number of business contacts expressed that labor market tightness was slowing the pace of hiring and constraining growth. Employers continued to invest in training programs to upskill new and existing employees. Some contacts added that funding for training and skills development was impacting starting salary budgets. Firms also continued to push for productivity and efficiency enhancements, typically through automation and technology investment, in an effort to reduce the need to add workers or augment the lack of available talent. Further, some business contacts reported adjusting employment standards, e.g., implementing remedial training and relaxing attendance policies, in order to attract and retain workers.

Annual wage increases, on average, remained between 3-4 percent, though many contacts expressed that labor costs were accelerating when full compensation costs, including healthcare, bonuses, and other incentives, were factored in. Wage pressures remained most acute among low-skill, trucking, construction, technology, and medical positions. As a way to avoid the higher cost of hiring new talent, some firms noted directing more wage dollars towards retention efforts.

Prices
Overall, reports from District firms remained consistent with the previous report, with some contacts indicating costs were increasing. While some businesses noted pricing power, there were some accounts of firms considering alternative approaches to maintain margins and offset increases. The Atlanta Fed's Business Inflation Expectations survey showed that year-over-year unit costs were up 1.8 percent in May. Survey respondents indicated that they expect unit costs to rise 2.0 percent over the next twelve months.

Consumer Spending and Tourism
Retail sales levels were unchanged from the previous report; however, online sales continued to grow at a faster pace than brick-and-mortar sales. The sentiment among District retailers and automotive dealers was mixed with those affected by tariffs expressing concern over trade policy uncertainty.

Sentiment among travel and hospitality contacts was unchanged from the previous reporting period. Contacts in Georgia, Florida, and Louisiana noted that demand for hotel rooms, flights, and attractions was on par with expectations for the second quarter. The outlook remains positive for the summer season.

Construction and Real Estate
Healthy economic fundamentals and declining mortgage interest rates continued to fuel optimism among District housing contacts. Although still below 2018 levels, firms indicated that the pace of home sales accelerated during the 2019 spring selling season. Meanwhile, the level of existing home inventory contracted and home price appreciation remained flat. Moving forward, as inventory levels continue to decline and construction costs for new homes edge higher, contacts indicated that home prices may experience increased upward pressure, making housing affordability a concern for many markets.

Commercial real estate (CRE) leasing and sales activity remained generally steady across most District markets and property sectors during the reporting period. Overall, most sectors experienced positive dynamics as rents continued to grow and vacancies trended downward at a modest pace. Business contacts reported strength in the multifamily, industrial, and office sectors. Outside of retail, the rate of new CRE construction remained at or above the long-term average.

Manufacturing
District manufacturing contacts reported a moderate rise in overall business activity since the last reporting period. Most firms indicated that new orders and production levels increased, while also reporting a modest decline in finished inventory levels. Contacts suggested that supply delivery times were essentially unchanged since the previous report. Expectations for future production levels fell slightly from the previous report, with just under half of contacts expecting higher production levels over the next six months.

Transportation
Reports from District transportation contacts were little changed since the previous report. Ports noted further strength in shipments of containers, and some reported continued investments in capacity expansion and channel deepening projects in anticipation of future growth. Railroads saw significant declines in overall traffic from year-earlier levels; year-to-date volumes were also down. Trucking companies indicated that freight activity improved from a soft first quarter, but was still down from a year ago. Regarding trade policy uncertainty, some transportation contacts developed contingency plans to reduce capital expenditures and headcount to offset tariff-related revenue shortfalls. Expectations at District ports are for the pulling forward of freight ahead of the tariffs followed by a drop off in activity in the second half of the year.

Banking and Finance
Improved earnings and solid loan performance kept conditions at financial institutions steady since the previous report. Contacts reported increased competition for deposits continued to put pressure on net interest margins. Still, earnings improved slightly due to tighter expense control and lower provisions for loan losses. In total, loan growth at financial institutions increased marginally although consumer loan growth continued to decline. Asset quality metrics remained healthy with nonperforming assets near historic lows.

Energy
Crude oil production and investment maintained an upward trend, though lack of adequate infrastructure to transport product to Gulf Coast refineries remained a challenge. Contacts reported significant investment in pipeline infrastructure projects. Firms also continued to sanction crude oil storage expansion projects. Investment in liquefied natural gas (LNG) units continued to pick up. Chemical manufacturing contacts shared that production volumes picked up after a slow start to the year. Renewable energy contacts indicated that construction of solar farms in Georgia were near completion and power wind farms in Florida were recently announced. Utilities contacts reported that while residential and commercial activity declined slightly over the reporting period, industrial activity was up among new and existing customers. District energy contacts remain optimistic about near-term activity.

Agriculture
Agricultural conditions across the District were mixed. Recent reports indicated much of the District was drought-free although parts of Alabama, Georgia, and the Florida panhandle experienced abnormally dry to moderate drought conditions. Conversely, recent heavy rains interfered with fieldwork in Louisiana and Mississippi where both soybean and rice planting were behind the five-year averages. Alabama, Georgia, and Tennessee were ahead of the five-year average in cotton planting, while Alabama, Florida, and Georgia were ahead of their five-year planting averages in peanuts. Several contacts reported that the combination of low commodity prices and some rising input costs were resulting in compressed margins. The May Florida orange forecast was down from the prior month's forecast, but continued to be higher than last season's production. On a year-over-year basis, prices paid to farmers in March were up for corn, cotton, and beef but down for rice, soybeans, broilers, and eggs.

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