The FED Said

Beige Book – January 16, 2019

Overall US Economic Activity

Economic activity increased in most of the U.S., with eight of twelve Federal Reserve Districts reporting modest to moderate growth. Nonauto retail sales grew modestly, as several Districts reported more holiday traffic compared with last year. Auto sales were flat on balance. The majority of Districts indicated that manufacturing expanded, but that growth had slowed, particularly in the auto and energy sectors. New home construction and existing home sales were little changed, with several Districts reporting that sales were limited by rising prices and low inventory. Commercial real estate activity was also little changed on balance. Most Districts reported modest to moderate growth in activity in the nonfinancial services sector, though a few Districts noted that growth there had slowed. The energy sector expanded at a slower pace, and lower energy prices contributed to a pullback in the industry’s capital spending expectations. The agriculture sector struggled as prices generally remained low despite recent increases. Overall, lending volumes grew modestly, though a few Districts noted that growth had slowed. Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.

 

Federal Reserve Bank of Atlanta

Summary of Economic Activity

Sixth District business contacts remained largely positive with a majority noting that economic activity grew at a moderate pace over the reporting period. Most contacts expect steady growth in the near-term; however, several contacts cited increased levels of uncertainty going into 2019, to include concerns over politics and trade. As labor markets remained tight, many firms noted increasing retention efforts. On balance, wages increased since the previous report, with pressure growing particularly among low-skill, hourly positions. Nonlabor input costs increased and the ability to pass along the increases varied among firms. Contacts reported that retail sales were solid during the holiday season and vehicle sales were up slightly. Reports from the hospitality sector were positive, reflecting strong advanced bookings for early 2019. Contacts reported that residential real estate activity slowed and commercial real estate activity remained stable over the reporting period. Manufacturers indicated that new orders and production levels decreased since the previous report. Contacts indicated that banking conditions were stable.

Employment and Wages

Similar to previous reports, business contacts remained focused on employee retention. District employers continued to expand wage and non-wage compensation offerings to retain workers. In spite of these efforts, firms expressed concern about their ability to meet growing demand with existing staffing levels. A few contacts from construction, manufacturing, and health services mentioned they were actively overstaffing certain positions where possible, or were holding on to workers even as demand eased in an effort to position themselves for future growth. Business contacts also mentioned that efforts to build culture and loyalty remained important to retention.

Average wage increases were typically reported around 3 percent across the District, a level that most firms intend to maintain in 2019. Broadly, businesses continued to report notable wage pressure among low-skill, hourly jobs, particularly in hospitality and retail. A number of business contacts noted that announcements by large national companies to raise their minimum wage intensified pressure among similar jobs. Challenges with escalating wage pressure were especially acute among small businesses, which reported struggles to compete with large- and medium-sized firms’ ability to increase wages.

Prices

District firms continued to report rising input costs, particularly for products impacted by tariffs. Price increases related to tariffs were passed along with no significant pushback or impact to margins. However, some businesses reported hesitancy to pass along increases unrelated to tariffs, opting instead to continue to internalize cost pressures through a combination of lower margins and productivity improvements. The Atlanta Fed’s Business Inflation Expectations survey showed year-over-year unit costs were up 2.2 percent in December. Survey respondents indicated they expect unit costs to rise 2.3 percent over the next twelve months.

Consumer Spending and Tourism

On balance, District retailers reported steady sales levels throughout the holiday season. Online sales levels continued to grow at a faster pace than brick and mortar sales. Recreational goods retailers noted an increase in sales since the last report. Automotive dealers reported an uptick in sales levels in November.

Travel and tourism contacts across the District noted a strong holiday travel season with growth in business and leisure travel. Hotel demand and average daily rates were higher than expected. The outlook for 2019 remains positive with healthy advanced bookings through the first quarter of the year.

Construction and Real Estate

Housing activity slowed on a year-over-over basis towards the end of 2018. In many District areas, existing home sales either moderated or declined. Although inventory levels remained low, they increased on a year-over-year basis in many markets. New home construction continued to lag behind demand with most new home starts being concentrated in higher price points within prime/high-demand submarkets. Though moderating, rising construction costs and low supply continued to push new home prices higher.

Commercial real estate leasing and sales activity remained steady during the reporting period. On average, vacancy rates in most District markets continued to trend downward modestly. Strength continued in the industrial, multifamily, and medical sectors. Contacts reported momentum in the industrial sector that continued to outpace the levels of new supply. Contacts continued to report concerns with bankruptcies and slowing activity in the big-box retail sector. Office market contacts reported overall continued strength; however, higher levels of employee densification and greater deliveries of space appear to be creating pockets of slowing in some local markets.

Manufacturing

Reports from manufacturing contacts indicated that business conditions softened slightly since the previous report. New orders and production levels decreased, and purchasing managers reported shorter wait times for supply deliveries. However, expectations for future production levels increased, with over half of contacts expecting higher production over the next six months, up from the previous report.

Transportation

The majority of District transportation contacts reported increased activity since the previous report. Ports noted record container volumes, along with further growth in trade of autos and heavy machinery. According to air cargo contacts, global air freight volumes continued to grow; however, in recent months, growth decelerated in some regions due to a softening in demand. Railroad contacts reported significant year-over-year increases in total traffic, including notable growth in intermodal shipments. Logistics firms saw improvements in volumes of delivered packages as compared with last year’s holiday season.

Banking and Finance

Conditions at financial institutions held steady over the reporting period. Higher interest rates improved earnings and net interest margins for the majority of banks and increased competition for deposits. Loan growth continued but at a slower pace, especially in real estate. Financial institutions continued to loosen underwriting standards on selected portfolios due to slowing demand for credit and increased competition. Credit quality metrics generally remained positive with nonaccrual loans remaining near historical lows; however, some institutions in the District experienced an increase in consumer delinquencies.

Energy

Contacts reported that takeaway capacity of oil and gas products from the West Texas Permian region to the Gulf Coast remained extremely tight. Deepwater production continued to pick up in the Gulf Coast, as new drilling platform projects came online in the fourth quarter. Refinery utilization declined in the fourth quarter as many plants engaged in maintenance/turnarounds during the winter months. Demand for renewable energy, especially electricity, continued to grow compared to electricity generated by coal, gas, or nuclear. Industrial consumption was mostly down in late 2018 due to seasonal factors. Weather and improved efficiencies continued to drive down residential and commercial consumption.

Agriculture

Agriculture conditions across the District were mixed. Recent reports showed most of the District was drought-free with the exception of parts of south Florida where there were abnormally dry to moderate drought conditions. The USDA designated some counties in Alabama, Florida, Georgia, and Mississippi as natural disaster areas due to damages and losses attributed to Hurricane Michael, Tropical Storm Gordon, and flooding. The December forecast for Florida’s orange crops was unchanged from the prior month, but up significantly from last year’s production. In mid-December, weekly cash prices for corn, cotton, and beef were up while rice, soybean, broiler, and egg prices were down on a year-over-year basis.

 

For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics

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