The following is the text of the Federal Reserve Board’s Sixth District-- Atlanta.
SIXTH DISTRICT - ATLANTA
Sixth District business contacts indicated that economic activity continued to expand at a very subdued pace in July and August. Retail sales grew more slowly than during the previous reporting period, although tourism activity remained solid. Existing home sales improved in Florida, but were weak elsewhere in the District. New home sales and construction were soft and downward pressure on prices persisted for both existing and new homes. Contractors reported low levels of commercial development. Manufacturing contacts indicated that the level of production and new orders increased, but at a slower pace than experienced earlier in the year. Bankers noted ongoing weakness in loan demand as both consumers and businesses were restrained in their borrowing activity. Most businesses continued to be cautious regarding adding permanent staff, with several indicating that they had chosen to hire temporary or contract workers to fill immediate labor needs. Contacts reported that on average, sales prices were up slightly from a year ago, although some retailers mentioned that weak sales were prompting them to lower prices. Energy contacts indicated plans to increase oil production capacity.
Consumer Spending and Tourism. Most District merchants reported that retail sales growth had slowed in July and August. Businesses noted a drop in sales and traffic compared with a year ago. The majority of contacts stated that they were keeping inventory levels lean and had no plans to increase supply in the near term. The outlook among most retailers was less optimistic than earlier in the year, although some contacts noted that the costs of cotton-based inputs for the spring selling season will not be as high as initially feared.
Tourism activity remained robust in the District. Hospitality industry reports cited increases in occupancy and room rates. Airport traffic was up, particularly in South Florida, which serves as a point of entry for cruise line travel as well as international travel from Latin America. Although some companies noted that the softer economic climate has led to a decline in advance bookings from business travelers, the overall outlook among contacts remained strong for the coming months.
Real Estate and Construction. The majority of District residential brokers reported that sales were slightly ahead of last year’s weak levels. Most of the increase came from Florida contacts, although several brokers there stated that a decline in bank-owned homes available to purchase had held sales back somewhat. Outside Florida, brokers found that sales were similar to last year’s levels. The majority of brokers indicated that housing inventories remained elevated. Brokers continued to note downward pressure on home prices with most indicating that prices were flat to slightly down compared with a year ago. The outlook weakened over the reporting period with most contacts anticipating sales growth to be down slightly over the next several months.
District builders reported that new home sales and construction activity were similar to year earlier levels. New home inventory levels declined somewhat, but builders noted downward pressure on new home prices nonetheless. Residential contractors indicated that home improvement construction improved from earlier in the year. Compared with the June report, builders’ outlook weakened somewhat with the majority of contacts expecting new home sales growth to be flat over the next several months and construction to be similar to last year’s weak levels.
Commercial contractors signaled that nonresidential construction was slow, although activity in the healthcare sector continued to be positive. Contacts reported aggressive bidding by contractors and subcontractors. On the leasing side, firms noted that the absorption of space had slowed somewhat in recent weeks. Overall, the outlook for construction and leasing activity weakened somewhat from previous months.
Manufacturing and Transportation. Manufacturers indicated that the level of new orders and production increased in mid-July and August, but at a slower pace than earlier this year. A leading auto dealer and many parts suppliers felt that the impact of supply disruptions from Japan had ended. A large tire manufacturer noted particular pressure in meeting a recent surge in orders as the supply chain normalized from the disaster in Japan. Many manufacturers reported increased investment in technology equipment in efforts to increase efficiency.
Railway firms cited increased capital expenditures, above-trend plans to hire, and strengthening exports - particularly coal. Trucking contacts expressed continued labor supply issues and elevated fuel costs, and have also projected demand for the remainder of the year to be somewhat softer than previously anticipated.
Banking and Finance. Bankers noted ongoing weakness in loan demand as both consumers and businesses were restrained in borrowing activity. Credit standards at banks and credit unions were little-changed and some firms, such as newer businesses or those related to real estate, reported difficulty obtaining loans. Contacts at large companies indicated they did not have many issues with credit availability. Many mentioned self-funding capital projects through the use of cash reserves or retained earnings. Some businesses signaled that they did not need additional credit, but had access to funds while others with financial issues struggled to get bank credit.
Employment and Prices. Most businesses reported muted hiring activity. Many held the view that sales are the key factor in determining labor demand, and uncertainty about future sales seems to be exacerbating firms’ unwillingness to commit to full-time employees. Hence, companies continued to hire temporary workers and contractors and are delaying longer-term projects. Many noted focusing on efficiency and productivity increases with existing staff to meet current or any seasonal increase in demand. Wage increases were reportedly subdued, with many business contacts opting for cash bonuses and restoration of benefits over annual salary increases.
Pricing information was mixed. Contacts reported that on average, sales prices were up slightly from a year ago, although some retailers mentioned that weak sales were prompting them to lower prices. Fewer manufacturers reported higher input prices than in previous months. Firms noted that they continued to face cost pressures, particularly from high materials and freight costs.
Natural Resources and Agriculture. The number of oil and gas rigs operating in the Gulf of Mexico has continued its gradual ascent in recent months. However, the current rig count is only about two-thirds of the number of offshore rigs in operation before the spring 2010 Gulf oil spill. Despite the recent decline in oil prices, contacts in the energy equipment fabrication business reported ongoing backlogs in orders for pipelines, supply boats, and drilling equipment. Energy producers are moving forward with plans to invest in increased oil production capacity.
While most of the District continued to experience varying degrees of drought conditions, recent rains have provided relief to some of the region’s stressed pastures and crops. Cotton prices were up compared with last year but have fallen from record highs. Peanut producers expect prices to increase as supply from areas outside of the District becomes constrained as a result of adverse weather.