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 slowly in September, and most expect little change in the near term.
Most retailers cited slow sales growth while auto dealers continued to experience strong results. Hospitality reports remained largely positive, with the exception of cruise-lines. Residential brokers and builders signaled that housing conditions continued to improve in many parts of the District as sales and prices of new and existing homes slightly increased compared with a year ago. Commercial development continued to improve, led by multifamily construction. Manufacturers indicated that new orders had softened while production levels only mildly increased. Bankers saw improvements in demand for overall loans, particularly those for housing purchases and refinances. Payrolls expanded modestly on net, and firms noted some deceleration in input prices, while wages remained relatively unchanged.
Consumer Spending and Tourism. Most District merchants reported that sales growth remained slow in September. Discount retail operations outperformed traditional department stores. Most retailers projected continued soft growth in sales through the end of 2012. Contacts in the auto industry reported that strong sales levels were maintained in September.
Leisure and business travel contacts continued to report strong activity and an optimistic outlook for the remainder of the year. Occupancy and room rates as well as convention bookings were solid. While there has been some drop in traffic from Europe, this was largely offset by strong visitor numbers from Canada and Latin America. Cruise-line bookings and onboard spending remained below expectations, but the industry anticipates some improvement next year.
Real Estate and Construction. District residential brokers indicated that recent existing home sales were up slightly compared with year-earlier levels. Buyer traffic also remained ahead of year-ago levels. Brokers again noted declining inventories, which continued to put upward pressure on home prices in many markets. Contacts anticipate modest home price gains over the next year; however, it is expected that neighborhoods hard hit by foreclosures will continue to experience home price weakness for some time. The short-term outlook for home sales remained positive overall, with the majority of contacts anticipating modest gains.
Reports from District homebuilders remained positive, as well. Builders indicated that recent new home sales and construction activity were up slightly from year-earlier levels and new home inventories remained below year-earlier levels. Construction remained mostly limited to more desirable locations, such as those in highly regarded school districts. Southeastern builders also reported that finished lot inventories varied across the region, but most anticipate a decline in those inventories over the next six months. Many indicated that financing terms remain prohibitive for acquisition and development. New home prices were slightly up compared with a year earlier. Homebuilders also witnessed stronger buyer traffic. The outlook for construction activity and new home sales remained positive.
Commercial contractors indicated that the pace of construction continued to expand and backlogs were slightly up from earlier in the year. Apartment development continued to dominate the District’s commercial real estate market. Multifamily rent growth remained positive but has slowed somewhat in recent months. Contacts indicated that the District’s office and industrial markets continued to make small improvements, while the retail sector was described as sluggish. Many contractors reported that clients remain hesitant to move ahead on new projects. However, most anticipate that construction activity will be flat to slightly up in 2013 compared with 2012.
Manufacturing and Transportation. While noting that new orders continued to slow, manufacturing contacts reported mild increases in production, employment, and finished inventory levels in September. Regional auto and auto parts producers, as well as firms that supply materials to the energy exploration and extraction sector, continued to report strong levels of production, but most other durables manufacturers noted a slight deceleration in output. Nondurables output, with the exception of food and chemicals, remained soft.
A Southeast port contact reported record-setting cargo volumes in fiscal year 2012, with increases across all categories. Despite the underlying increase in demand tied to replacement of aging truck fleets and the benefits of increased fuel- efficiency, new orders for heavy-duty trucks have stalled recently. Rail contacts reported that lumber shipments have increased. Air cargo companies saw an increase in cargo volume tied to the launch of various smartphones and computer tablets, which favor shipment by air over other modalities.
Banking and Finance. Banking contacts reported an increase in demand for mortgage loans for both purchases and refinances, although some contacts noted fewer than half of the applications actually were approved. The improvement in demand for purchase loans was driven by activity in entry-level homes. Demand for auto loans remained strong. Business lending had increased slightly; however, contacts noted most of the increase was not organic loan growth but was primarily from customers switching from other lenders or credit cards.
Employment and Prices. Regional employment growth picked up slightly in September, but remained muted. Reports indicated that sectors related to energy, autos, and housing were experiencing most of the hiring activity. Reports also cited deepening ties between private employers, education representatives, and government officials in an effort to address training deficiencies for in-demand positions. The majority of contacts reported that stagnant demand is the major reason behind sluggish employment trends, although uncertainty related to fiscal policy continued to weigh on some firms’ hiring plans.
The majority of businesses contacted reported relief for some input prices and little change in wage plans. Firms responding to our Business Inflation Expectations survey reported that unit costs were up 1.3 percent in September over the past year, which is 0.3 percentage points lower than the August reading. Looking forward, businesses’ expectations for inflation also moderated somewhat. On average, firms expected unit costs to rise 1.7 percent over the next 12 months. Though that number was down from August, survey contacts noted that rising materials costs could be a source of moderate upward price pressure going forward. Along those lines, several manufacturing contacts indicated that some input prices have increased recently, causing concern of additional margin pressure.
Surveyed firms reported that sales levels were 7.6 percent below “normal” times, though assessments varied widely by the size of the firm. In particular, small and medium-sized businesses reported experiencing about twice as much slack as their larger counterparts, a finding that is consistent with anecdotal insights gathered from our business contacts.
Natural Resources and Agriculture. After brief, precautionary shut downs related to Hurricane Isaac, regional refiners fully restored operations with very little damage from the storm. Energy industry contacts continued to report that Gulf Coast refineries were undertaking investments to increase production capacity following refinery closures elsewhere in the country. Natural gas prices continued to experience downward price pressures. Contacts continued to note that inexpensive natural gas had prompted downstream manufacturers to relocate overseas operations to the U.S., prioritizing locations near refining operations.
Agriculture contacts said that the rise in some crop prices, resulting from the drought in the Midwest, had led to increased crop production in the Southeast where soil conditions were more favorable, but the overall rise in feed prices was putting pressure on livestock producers. Compared with the same time last year, prices paid to farmers for corn, rice, soybeans, beef, and broilers were up while cotton prices were down.
SOURCE: Federal Reserve Board