U.S. Federal Reserve Beige Book: Atlanta District (Text)

The following is the text of the Federal Reserve Board’s Sixth District-- Atlanta.

SIXTH DISTRICT - ATLANTA

Summary. Sixth District business contacts described economic activity as expanding at a somewhat stronger pace in January and early February compared with late last year. Expectations were generally more positive, although firms continued to express caution with regard to the outlook.

Retailers noted that sales and traffic increased compared with a year ago and auto sales remained robust. Hospitality contacts, with the exception of cruise lines, reported strong bookings for this year. Homebuilders and brokers reported that unseasonably warm weather has helped bolster residential real estate activity by pulling some activity forward. Nonetheless, overall home sales and construction levels remained weak apart from the generally robust multifamily sector. Manufacturers and transportation contacts continued to note positive activity on balance. Bankers reported a modest improvement in loan activity at larger institutions. More firms reported increased hiring, although contacts continued to signal they approached hiring decisions very cautiously. Concerns over increased input costs generally eased as most firms reported that input prices leveled off. Only a few contacts reported having significant pricing power.

Consumer Spending and Tourism. District retail contacts noted that sales and traffic in January and early February were up from a year ago. Final holiday sales reports were generally positive as slightly over half of our retail contacts indicated that sales were better than last year. Roughly half noted that inventory levels were up slightly compared with last month, and most were satisfied with current levels. Most merchants expect overall sales to improve over the next three months. Retailers also expect overall sales to improve modestly over the course of 2012. Auto dealers noted that the warm weather experienced in January likely boosted sales for the month, and they anticipate new vehicle sales to continue to improve.

Hospitality contacts reported that tourism activity remained strong and most were optimistic regarding the outlook for leisure and hospitality spending in 2012. Attendance for major conventions increased and bookings and lead volume rose, according to business travel contacts. However, there were concerns about higher fuel costs and the adverse impact it may have on drive-to traffic at regional tourist destinations. Cruise line bookings have suffered in the wake of the maritime disaster in Italy.

Real Estate and Construction. The majority of District residential brokers reported that home sales accelerated in January and early February and stand above levels from the same time period last year. However, reports from Florida brokers were more mixed. Contacts noted that inventory levels continued to decline on year-over-year basis and home prices were nearly even with a year ago. The outlook among brokers for sales growth continued to improve with most anticipating modest year-over- year gains over the next several months.

Most District homebuilders indicated that new home sales and construction activity growth, measured year-over-year, increased slightly during January and early February; however, several contacts noted that unseasonably warm weather in the region likely pulled some activity forward. Builders continued to report downward pressure on home prices while new home inventories remained below year-earlier levels. Contacts noted that multifamily construction remained robust. Over the next several months, homebuilders anticipate new home sales and construction to be flat to slightly up compared with a year earlier.

Most commercial real estate contacts indicated that conditions continued to improve slowly in the region. Contractors noted a slight improvement in demand but the market remained very competitive and activity remained at low levels. Brokers continued to report modest improvements in demand for space in several parts of the District with some noting that rent concessions had abated. The outlook among contacts was similar to our last report with most contractors and commercial real estate brokers anticipating that construction activity will improve slowly during 2012.

Manufacturing and Transportation. Manufacturers across the region noted more positive results in January and early February compared with previous reports. In particular, firms reported increased levels of new orders along with improved expectations for future orders. Most contacts also signaled that inventory levels have risen in line with these improved order expectations. Three major auto manufacturers announced plans to increase production at their facilities in Alabama and Georgia, and a foreign automaker also noted that a parts manufacturing facility will relocate to the Sixth District.

Transportation contacts reported that inventory-building trends appeared to be similar to the end of last year. A freight forwarding company noted that orders were stable and a large railroad firm continued to report strong increases in auto shipments. Coal inventory levels declined at the end of last year, but in recent months have exceeded targeted levels as mild weather and low natural gas prices dampened demand for coal- fired electricity generation. Contacts noted that both imports and exports have leveled off since the beginning of the fourth quarter of 2011, although trade with Latin America continued to experience modest growth.

Banking and Finance. Liquidity levels remained high at regional banks as most continued to experience high deposit balances and soft loan demand. Several large banks noted some growth in outstanding C&I loans; in part, a result of loan acquisitions from other institutions and continued growth in areas such as energy and healthcare. Bankers also reported increased consumer lending attributed mainly to auto financing. Contacts remain cautious regarding the economic environment and most are forecasting low loan growth in 2012, but do not expect further deterioration in capital levels.

Employment and Prices. Firms indicated that hiring expectations going into 2012 are better than they had been going into 2011. However, many contacts noted that plans to increase profits still revolved around further efficiency gains from improvements in internal operations. Several businesses reported plans to increase payrolls because they expect an improvement in sales going forward. They appeared to have regained their customer base, and these expectations seem to be transmitting into plans for expansion. Some firms still indicated a preference for contract workers for short-term projects, but several expressed increased willingness to consider them for permanent positions. Aside from optimism about future sales, some contacts also reasoned that their current employees do not always possess the necessary skills, leaving firms with no choice but to hire new workers.

Concerns over increased input costs eased further, although several manufacturing firms did note an increase in commodity prices since the last report. Few contacts reported having significant pricing power. According to the firms surveyed in the Atlanta Fed’s January Business Inflation Expectations (BIE) survey, unit costs were expected to rise 1.8 percent for the year ahead, down slightly from December expectations. Firms continue to operate in an environment of below normal sales and depressed margins, according to the survey, though both have been slowly improving since October of last year.

Natural Resources and Agriculture. Contacts in the energy exploration sector noted that recent lease auctions have helped stimulate more industry optimism, contributing to an improvement in investment conditions. Regional gasoline inventories remained above their seasonal norms for this time of year as national and global gasoline consumption remain relatively soft, although contacts reported ongoing concern about the impact of geopolitical uncertainty in some OPEC countries on energy prices going forward.

Significant rains have eased drought conditions in parts of Alabama, Mississippi, and Louisiana, while parts of Georgia and Florida have seen drought conditions worsen. Mild temperatures throughout the region are of concern to peach and other fruit crop growers hoping for adequate conditions for the current growing season. On a year-over-year basis, prices received by farmers were higher for many of the region’s agricultural products. Contacts reported that some farmers in Alabama and Georgia were reviewing their planting plans in light of their concerns of labor shortages.

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