Federal Reserve Bank of Atlanta: Beige Book Sept 2018
Federal Reserve Bank of Atlanta
Summary of Economic Activity
Sixth District business contacts indicated that economic activity expanded at a moderate pace since the previous report. On balance, the outlook among firms for the remainder of the year was positive, despite some uncertainty surrounding trade policy. Firms continued to cite hiring challenges, especially for low-skilled and hourly positions. Some businesses reported growing wage pressure. Rising nonlabor costs for select inputs such as transportation and steel were noted, as was an improved ability to pass through price increases. Retailers reported growth in sales, and automotive dealers indicated sales were up year-over-year. Tourism in the District was described as solid over the late summer months, on balance. Residential builders and brokers indicated modest growth compared with year-ago levels; however, diminished lot and land inventory constrained builders' ability to meet demand. Commercial real estate contacts reported strong demand. Manufacturers noted increases in new orders and production.
Employment and Wages
Business contacts reported that labor market growth in select regions was being restrained by firms' inability to recruit staff, particularly among the low-skill/hourly workforce. In response, firms shared plans to move to locations with larger labor pools, to change/reduce personnel standards and requirements, or continue to pursue automation to replace workers.
Businesses across the District continued to report some increases in nonlabor input costs, specifically relating to transportation and steel, noting slightly more ability to pass along these price increases than in the previous report. Anticipation of rising costs related to tariffs continued to contribute to vendor price increases for commodities. The Atlanta Fed's Business Inflation Expectations (BIE) survey showed year-over-year unit costs were up 2.0 percent in August. Survey respondents indicated they expect unit costs to rise 2.1 percent over the next twelve months.
Consumer Spending and Tourism
District retail contacts reported growth in sales volume since the last report. Solid tourism activity was cited as benefiting retailers and heavily influencing sales activity in some markets. Retailers expect continued positive momentum for the remainder of the year. Automobile dealers reported an increase in year-over-year sales volume.
Construction and Real Estate
On balance, reports from District residential real estate contacts indicated modest but ongoing growth. Many builders reported that construction activity was up from the year-ago level. The lack of lot and land availability remained a constraint on building activity. Several contacts stated that even if they had the developed land, construction labor market conditions would keep them from being able to meet current levels of housing demand. District builders expect home sales activity to hold steady over the next few months.
Manufacturing contacts reported strong overall business conditions from mid-July through August. Most firms cited increases in new orders and production. Supplier delivery times were said to be getting longer, while finished inventory levels remained elevated. Uncertainty regarding tariffs and trade policy continued to weigh heavily on manufacturers' sentiment as expectations for future production levels decreased from the previous period. Slightly less than one-third of contacts are expecting higher production over the next six months.
District transportation contacts noted increased activity during the reporting period. On a year-over-year basis, railroad traffic was up notably, primarily due to double-digit increases in shipments of grain, petroleum and petroleum products, pulp and paper products, and iron and steel scrap. District ports cited substantial growth in container traffic, breakbulk, and dry bulk freight. Air cargo contacts noted that domestic activity was up due to increased e-commerce shipments; international cargo from Latin America was described as robust, but exports to Europe had softened. Transportation contacts noted no significant disruptions in the movement of freight as a result of changes in trade policy.
Banking and Finance
Earnings continued to improve for financial institutions, driven by a stronger net interest margin. Asset growth continued to slow due to lower demand for credit amid higher interest rates and savings from tax reform. Credit quality remained strong among most financial institutions although underwriting standards loosened for some credit products, particularly residential mortgages. Transaction accounts still comprised the majority of financial institutions' funding, but borrowings were increasingly funding new loan growth.
Fuel refining capacity utilization continued at a record pace and crude production remained strong. Exports of petroleum products continued to rise. Contacts noted increasing activity offshore in the Gulf of Mexico, including lease purchases for exploration spots. Utilities power generation projects picked up, particularly involving maintenance on power facilities. Utilities sector contacts continued to cite increases in the share of power generation from natural gas. Some contacts expressed concern that tariffs on steel and aluminum may influence the viability of planned industrial construction and plant expansion projects in Louisiana.
Agriculture conditions across the District continued to be mixed. Drought conditions were little changed from the previous report; most of the District remained drought free although there were reports of abnormally dry conditions in much of Louisiana and in parts of Mississippi and Alabama. August production forecasts indicated year-over-year increases in rice, soybean, and cotton, while peanut production was down. Year-over-year prices paid to farmers in June were up for corn, cotton, rice, soybeans, broilers, and eggs, while beef prices were down. However, since the last report, weekly comparisons indicated lower commodity cash prices for some recently tariffed agriculture exports such as soybeans, and the USDA has announced a financial relief program for affected agriculture producers.