U.S. Federal Reserve Beige Book: Atlanta District (Text)
The following is the text of the Federal Reserve Board’s Sixth District--Atlanta.
Summary. Reports from Sixth District business contacts indicated that economic activity expanded at a modest pace in July through mid-August. The majority of contacts described their short-term outlook for future business activity as restrained.
Most retailers indicated that sales growth had slowed with the exception of autos, which remained quite positive. Tourism contacts continued to report strong activity in all segments except cruise lines. Residential brokers and builders noted improvement in home sales and construction. New and existing home sales prices were reported to be modestly higher than year- ago levels. Commercial builders continued to note improvement, driven by the multifamily sector. Manufacturers reported a pullback in new orders and production levels. According to banking contacts, loan demand remained low but some improvements were registered in home mortgages, and auto lending was brisk. Hiring activity remained muted across the District. The trend of using temporary workers to fill labor needs continued to be cited by many firms. Some contacts said that they had experienced lower overall input prices, but rising food prices was a concern. Wage pressures remained in check.
Consumer Spending and Tourism. Most contacts in the retail sector reported generally slower sales. Contacts in the restaurant industry in particular were less positive in July. Discount retail operations performed somewhat better than traditional department stores, while luxury goods merchants remained largely positive, although their reports were more mixed than earlier in the year. Sales expectations for most retailers remained conservative. Auto sales continued to grow at a solid pace and dealers anticipated continued strong results.
Hospitality contacts reported strong hotel occupancy and room rates for July through mid-August. Convention bookings showed continued strength. Cruise line results remained below expectations. However, contacts in that sector anticipate stronger business in 2013. Florida contacts noted a drop off in tourism activity from Europe, but that was being offset by the increase in visitors from South and Central America.
Real Estate and Construction. District residential brokers reported that sales were up slightly compared with year-ago levels. Brokers continued to note declining inventories, which has put some upward pressure on home prices in many markets. Contacts indicated that buying interest continued to improve from earlier in the year. The outlook for home sales over the next several months remained positive, with the majority of contacts anticipating modest gains.
Reports from District homebuilders remained positive as well. Most said that recent activity had met or exceeded their expectations. New home sales were up notably from year-earlier levels and construction exceeded last year’s levels. Most builders reported that new home inventories declined further. Several builders also noted that finished lots were scarce and development of new lots would not be financially feasible until home prices increased significantly. Most builders indicated that new home prices were flat to slightly up compared with a year earlier. The strongest gains were again reported by Florida builders. Homebuilders witnessed strong buyer traffic and the outlook for construction activity and new home sales remained positive. Apartment sector gains continued to drive improvements in the District’s commercial real estate markets. Occupancy levels were described as high and rental rates rose further. Contacts indicated that the region’s office market continued to make small improvements, while the industrial and retail sectors cited some weakening in demand from earlier in the year. Commercial contractors indicated that the pace of construction improved somewhat from earlier in the year, while backlogs have also risen in many areas. Most anticipated that construction activity will likely mirror last year’s levels through the end of the year. Some contacts suggested that 2012 would be the bottom of the market, with improvements expected next year.
Manufacturing and Transportation. Manufacturing contacts noted a contraction in new orders and production levels since the last report. Roughly one quarter of manufacturing contacts still expect production to improve from current levels over the next three-to-six months, but an equal number anticipate additional declines. Half see output levels near current readings. Despite falling non-labor input costs, a slump in new orders is keeping margins thin. Construction-related manufacturing firms cited a bit more optimism since the last report, crediting recent improvements in several housing market indicators.
Trucking contacts indicated that freight demand and capacity remained closely in balance. Regulatory issues, increasing costs, and a tight driver market continue to put pressures on bottom lines. District air cargo contacts cited continued positive growth, however at a slightly slower pace than earlier in the year. Sharp volume declines with Asia and Europe have been offset by increases in other regions. Rail contacts reported continued increases in intermodal shipments, which have helped to moderate declines in car loads of coal and agricultural products. Shipments of construction-related materials continued to be mixed; lumber remained positive, while aggregates and chemicals declined.
Banking and Finance. Banking contacts continued to note margin and profit pressures. Competition among banks and credit unions for high-quality loans remained intense, further driving down margins. A few bankers cited positive loan growth, but overall loan demand remained low. Some contacts noted pockets of improvement in residential real estate lending, driven mostly by refinancing. Contacts also reported robust auto lending. Community banks looked to fee-related services in an effort to become less dependent on the pricing spread between loans and deposits. Some contacts cited increased consumer credit card use.
Employment and Prices. Regional employment growth remained very tepid. Few firms reported their intention to add to current staffing levels, but there were only scattered reports of firms planning layoffs. Companies that rely on contracts with the Department of Defense were not yet cutting back on staff or otherwise changing their business plans because the timing and focus of defense spending cutbacks is highly uncertain. Many firms continued to note increased hiring of temporary or contract workers. Several companies have also reported large capital investments which reduced the need for labor. Meanwhile, contacts also continued to note difficulty filling highly skilled positions. Several firms continued to report that weak demand and uncertainty surrounding fiscal and regulatory policy weighed on decision-making processes.
Businesses reported some relief on input prices and little change in wage plans, although some employers noted that they were increasing starting pay for workers with specialty skills. The potential impact of higher food prices was noted by many companies across several sectors. Paired with the recent rise in gasoline prices, higher food costs will have a negative impact on lower and middle-income constituents according to community development contacts. Firms responding to our Business Inflation Expectations survey reported steady unit cost expectations in July. On average, they expect unit costs to rise 1.7 percent over the next 12 months. While similar to June’s reading, the number was down slightly from 1.8 percent in May.
Natural Resources and Agriculture. Contacts reported a renewed increase in production at Gulf Coast refineries because of recent closures along the East Coast. An increase in demand for crude oil and oil products, along with the Gulf Coast seeing particularly high demand for diesel fuels and other distillates, has helped to support refined product prices.
Recent rains improved conditions in many parts of the District. Compared with the same time last year, prices paid to farmers for soybeans, corn, oranges, beef, hogs, and broilers were up while cotton was down. Although beef prices have increased over the last year, contacts reported that both the drought and high feed prices have resulted in lower prices paid to farmers on a month-over-month basis.