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Beige Book Report: Atlanta

September 4, 2019

Summary of Economic Activity
Sixth District business contacts indicated that economic activity softened slightly during the reporting period. Many firms noted persistent challenges with filling positions. Annual wage increases remained between 3-4 percent, on average, and businesses across the District continued to report increased nonlabor input costs. Tourism activity during the summer season was mixed. Retail sales levels remained steady since the last report, and vehicle sales increased. Residential real estate sales and construction remained below year-ago levels, and home prices appreciated modestly. Commercial real estate contacts reported that leasing and sales activity remained steady throughout the District. Manufacturers noted a decrease in overall business activity since the previous report. Conditions at financial institutions were stable, although consumer loan growth continued to decline.

Employment and Wages 
Reports of challenges finding, hiring, and retaining workers persisted for various labor market segments. Several business contacts continued to share that their inability to secure labor was holding back growth, encouraging investments in automation, and pushing a few firms to acquire competitors as a means of gaining labor resources. Employers continued to collaborate with workforce development organizations and schools to enhance curricula at vocational centers and to create pipelines of potential employees. A number of contacts expressed that hiring and retention costs, primarily those associated with training programs, were rising. Employers continued to report that while they had increased wages to attract and retain workers, efforts to improve employee benefits offerings, enhance work arrangement flexibility, eliminate some drug testing, and reduce experience requirements remained prominent attraction and retention tools.

Annual wage increases, on average, remained between 3-4 percent, though several employers noted that, in some cases, overall compensation was accelerating at a fast clip as healthcare costs were rising. Wage growth was concentrated in technology, healthcare, construction, and lower-skilled hourly positions. Business contacts continued to report that demographic shifts from older experienced workers to younger inexperienced workers were compressing salary budgets.

Prices 
Businesses across the District continued to report modest increases in nonlabor input costs. Firms affected by tariffs were typically successful in passing along increases and noted some success in holding on to margins. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.9 percent in August. Survey respondents indicated they expect unit costs to rise 2.0 percent over the next twelve months.

Consumer Spending and Tourism
While retail sales levels remained steady since the last report, District retailers noted heightened uncertainty among consumers due to the geo-political environment; they also expressed concerns about whether this uncertainty will impact consumer confidence and spending behavior during the upcoming holiday season. New vehicles sales levels increased month-over-month in July with light trucks and SUV units driving the increase; sales of used vehicles also rose.

District tourism activity was mixed, and hospitality contacts reported an uptick in uncertainty since the last report. On balance, the summer season was softer than expected with a year-over-year decline in hotel occupancy and average daily rates in Louisiana and Florida. Contacts in Alabama and Georgia reported strong leisure travel and business conference bookings.

Construction and Real Estate
Although a healthy labor market and declining mortgage rates sustained housing demand throughout the District, sales remained below year-ago levels in several markets. Supply constraints, particularly in more affordable price segments, remained a primary impediment to stronger sales. Additionally, new home construction remained down from year-ago levels. Although very few markets experienced a decline in home values, the rate of home price appreciation continued to moderate in most markets as the pace of home sales slowed. Moderate price pressure coupled with declining mortgage rates helped increase housing affordability.

District commercial real estate contacts reported leasing and sales activity remained stable since the previous report. Overall, rents continued to grow and vacancy trended downward at a modest pace. However, some contacts noted slowing rent growth and greater concessions in the multifamily, retail, and office segments. Despite increasing costs, contacts reported strong construction activity. Robust multifamily construction continued to dominate specific metro submarkets leading to increased concerns of possible oversupply in a few areas. Industry participants noted continuing strength in the industrial sector. Contacts reported that capital for most projects was readily available via banks and non-bank entities.

Manufacturing
Manufacturers reported a decrease in overall business activity since the previous reporting period. A number of firms indicated that new orders and production levels declined, while finished inventory levels continued to rise. Purchasing managers cited that supply delivery times were slightly longer than normal and a few contacts indicated that tariffs were impacting business activity. Expectations for future production levels decreased, with just over one quarter of contacts expecting higher production levels over the next six months.

Transportation
District transportation contacts indicated that activity was generally consistent with the previous report. Ports experienced increases in container traffic and bulk and break bulk cargos. Logistics contacts reported continued growth in e-commerce shipments. Trucking contacts, however, reported weaker year-over-year freight volumes, attributed to slowing demand and excess capacity. Railroad contacts noted further declines in intermodal shipments and total rail traffic compared with year earlier levels. Air cargo contacts reported a continued deceleration in international cargo volume caused by slowing global economic conditions and trade policy uncertainty.

Banking and Finance 
Conditions at financial institutions were stable. Total loan growth was steady although consumer loan growth continued to decline. Competition for deposits continued to put pressure on net interest margins along with lower loan yields. Nonperforming assets remained near historic lows.

Energy 
Investment in pipeline infrastructure to transport liquefied natural gas (LNG) and crude oil to Gulf Coast refiners remained elevated, as firms endeavored to alleviate product bottlenecks. Companies continued to pursue development of LNG and crude export facilities along the Atlantic and Gulf Coasts. In anticipation of Hurricane Barry, offshore producers evacuated hundreds of drilling platforms in the Gulf of Mexico, causing oil and gas production to fall temporarily. A number of contacts reaffirmed that while construction on industrial megaprojects, largely chemicals manufacturing and oil and gas refining expansion, slowed in 2019, planned investment along the Gulf Coast picked up during this reporting period. Utilities contacts confirmed the acceleration in industrial activity, observed via natural gas and petrochemical utilities segments. Utilities contacts also shared that activity in renewables increased in recent months, particularly solar energy facility installations across Florida, with many projected to be up and running in the 2020 to 2021 timeframe.

Agriculture
Agricultural conditions across the District were mixed. Recent reports indicated much of the District was drought-free although parts of Alabama, Georgia, the Florida panhandle, and Tennessee experienced abnormally dry to moderate drought conditions. Some producers in Louisiana reported crop damage due to Hurricane Barry. Average farm real estate values in the District rose year-over-year with the exception of Georgia, where values declined. On a year-over-year basis, prices paid to farmers in June were up for corn and beef but down for cotton, rice, soybeans, broilers, and eggs.

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