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Beige Book Report: Atlanta

October 16, 2019

Summary of Economic Activity
Reports from Sixth District business contacts indicated that economic activity expanded modestly from mid-August through September, and most contacts expect a similar pace to continue for the remainder of the year. The labor market remained tight, and a growing number of contacts shared reports of wage pressures increasing among lower-skilled positions. Some firms noted rising nonlabor costs and several contacts impacted by tariffs reported the ability to pass along price increases. Retail sales levels remained unchanged since the previous report and automobile dealers noted sales were up for trucks and SUVs. Tourism activity was reported as mixed heading into the fall season. Residential real estate market activity improved since the previous report, and commercial real estate activity was stable. Manufacturing activity improved with purchasing managers noting increased new orders and production since the previous report. Bankers indicated that activity was steady, on balance.

Employment and Wages
Most firms reported that staffing levels were in line with expectations for flat to slightly higher growth in payrolls compared with the prior year. Exceptions emerged in industry sectors directly related to export logistics and freight, where some labor force reductions were noted. Overall, however, business contacts continued to observe tightening in several labor market segments, sharing that many positions remained unfilled for long periods of time, encouraging some employers to lower hiring standards. Labor availability challenges were broadly viewed as firms' biggest constraint to growth. As a result, firms continued to explore recruiting and retention options.

Annual wage increases, on average, remained in the 3-4 percent range; however, wage growth continued to accelerate for lower-skill positions. Across industry sectors, there was growing dialog about increasing minimum hourly wages to $15 per hour.

Prices
Some firms reported rising nonlabor input costs, particularly for products impacted by tariffs. Overall pricing power remained limited and some businesses were considering alternative approaches to maintaining margins. However, several contacts impacted by tariffs were more successful in passing along increases. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.9 percent in September. Survey respondents indicated they expect unit costs to rise 2.0 percent over the next twelve months.

Consumer Spending and Tourism
District retail sales levels were unchanged since the previous report. Retailers remained concerned that heightened uncertainty among consumers due to the geo-political environment would negatively impact consumer confidence and spending behavior during the upcoming holiday season. Light trucks and SUV units drove the month-over-month increase in new vehicles sales in August while sales of used vehicles also rose.

District tourism activity remained mixed, and uncertainty remained elevated since the last report. On balance, the start of the fall season was softer than expected with a year-over-year decline in hotel occupancy and average daily rates in Louisiana and Florida. Strong leisure travel and business conference bookings were reported in Alabama and Georgia.

Construction and Real Estate
Low mortgage rates improved housing affordability and led to increased demand for housing throughout the District. Overall, home sales increased on a month-over-month and a year-over-year basis. Demand remained strongest in the more affordable price segments, where inventory remained limited. Declining inventory levels led to strong upward pressure on home prices. New home sales improved as builders sought to ramp up construction levels while offering incentives and discounts to increase sales traffic.

Overall, the pace of activity in the commercial sector remained steady during the reporting period. Most sectors experienced positive dynamics as vacancies continued to trend downward. Despite growing construction costs, contacts reported healthy construction activity. A robust amount of concentrated new multifamily construction continued to dominate specific metro submarkets leading to increased concerns of possible oversupply. Industry participants noted continuing strength in the industrial sector. Contacts reported capital was readily available, and that greater amounts of financing along with loosening underwriting standards were creating strong tailwinds and risks for some projects.

Manufacturing
District manufacturing contacts reported a moderate rebound in overall business activity since the last reporting period. New orders and production levels increased notably and purchasing managers indicated that supply delivery times were slightly longer. Finished inventory levels were reported to have increased somewhat, while optimism for future production was unchanged, with close to one-third of contacts expecting higher levels of production over the next six months.

Transportation
On balance, transportation activity was little changed since the previous report. Total rail traffic fell, and intermodal volumes declined substantially. Trucking companies saw decreased shipments compared with year-earlier levels. Air cargo contacts reported weakness in international freight volumes. Port contacts continued to report record levels of growth in container traffic.

Banking and Finance
Conditions at financial institutions were steady. Margins at banks were stable as higher loan yields offset increased funding costs. Total loan growth was positive but slowing, especially for smaller community banks. Asset quality remained strong with fewer loans transitioning from 30-89 days delinquent to 90 days or more.

Energy
Energy manufacturing continued to expand across the District in order to meet growing domestic and global demand for chemicals, natural gas, and refined products. Business contacts reported continued investment in pipeline infrastructure, as demand for transportation outlets for products to be processed remained elevated. Investment persisted in utilities, where growth in refining and chemical processing segments has necessitated additional power plants and transmission lines. Utilities contacts described growing investment in natural gas pipeline infrastructure. Renewables activity was steady from the prior reporting period, as solar energy facility installations continued across Florida.

Agriculture
Agricultural conditions remained mixed. Reports indicated much of the District was drought-free, although parts of Alabama, Georgia, the Florida panhandle, and Tennessee continued to experience abnormally dry to moderate drought conditions. The USDA designated several counties within the District as natural disaster areas due to damages and losses attributed to several inclement weather events this year. Cotton, corn, and peanut production forecasts were ahead of last year's production while rice and soybean production forecasts were below. On a year-over-year basis, prices paid to farmers in July were up for corn and beef but down for cotton, rice, soybeans, broilers, and eggs. However, on a month-over-month basis, prices increased for corn, cotton, rice, and soybeans but declined for beef, broilers and eggs.

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