The FED Said

Federal Reserve Bank of Atlanta

Summary of Economic Activity
On balance, reports from Sixth District business contacts indicated that economic activity continued to expand at a modest pace from mid-May through June. Although contacts shared concerns over uncertainty related to tariffs, the overall outlook among businesses remains positive as most expect continued modest growth for the second half of the year. District firms continued to report difficulties filling positions. On balance, wage growth remained steady. Businesses reported increases in non-labor input costs. District merchants noted sales activity increased since the previous reporting period. The tourism sector experienced solid activity throughout most of the District. Real estate contacts noted that home sales, albeit down from a year-ago, increased since the spring season. Overall, the housing market experienced moderate price appreciation. Commercial real estate contacts indicated that activity was steady. Manufacturers reported growth in new orders and increasing production levels. Bankers indicated a slight softening in overall loan activity.

Employment and Wages 
Contacts continued to report hiring challenges. However, a few transportation contacts observed some easing in the labor market tightness for drivers over the last couple of months. Some employers noted relaxed policies or standards to hire and retain workers. Broadly, firms continued efforts to expand their pools of prospective employees, e.g., pursuing recent veterans, and partnering with other organizations to develop or enhance vocational centers. Firms indicated investing significantly in training programs to attract new workers or upskill existing staff. A number of contacts expressed that hiring and retention costs were rising, primarily associated with training and certification programs.

Annual wage increases, on average, remained between 3-4 percent. For lower-skilled hourly workers, several employers reported increasing wages to $15 per hour, depending on competition. While many contacts pointed out that employee bargaining power increased, non-financial benefits focused on work-life balance often dominated demands, rather than higher wages.

Prices 
Contacts continued to report rising input costs with many expecting the pace to continue through 2019. Despite previous efforts to minimize cost and margin pressures, some companies found it necessary to pass through additional costs owing to tariffs. The Atlanta Fed’s Business Inflation Expectations survey showed year-over-year unit costs were up 2.1 percent in June. Survey respondents indicated they expect unit costs to rise 2.0 percent over the next twelve months.

Consumer Spending and Tourism
Contacts reported little change to retail sales levels since the last report. Online sales continued to grow at a faster pace than sales from brick-and-mortar stores. Contacts in the retail and the automobile industry noted concerns with uncertainty in relation to tariffs and the effects changes may have on pricing and demand.

District tourism and hospitality contacts continued to report healthy activity since the last report. The start of the summer season was robust with the number of visitors to Florida, Georgia, and Louisiana exceeding expectations. Although advanced bookings remained healthy through 2019, contacts expressed concern over the potential impact geo-political uncertainty might have on international travel to the United States.

Construction and Real Estate
A decline in mortgage rates coupled with a relatively healthy economy continued to support improving demand for housing throughout the District. Overall home sales, though still down year-over-year, increased through the spring selling season. Demand was strongest in the more affordable price segments, where inventory remained limited. Still, overall inventories increased modestly over the reporting period, leading to more moderate home price appreciation in most markets. However, affordability remained a concern as higher construction costs continued to make it difficult for homebuilders to deliver reasonably priced products.

Commercial real estate contacts reported steady leasing and sales activity throughout the District; however, some contacts reported experiencing longer transaction times. Overall, most sectors experienced positive dynamics as rents continued to grow and vacancies trended downward at a modest pace, and contacts reported an uptick in new projects. Industry participants noted continuing strength in the multifamily and industrial sectors, and financing capital was reported to be readily available for projects.

Manufacturing
Manufacturers reported a modest increase in overall business activity. New orders and production levels continued to increase, although the pace decelerated slightly from the previous reporting period. Purchasing managers indicated that finished inventory levels rose modestly and wait times for supply deliveries were slightly longer. Several contacts suggested that tariffs were creating a heightened level of uncertainty. Expectations for future production levels decreased, with just over one third of contacts expecting higher production levels over the next six months.

Transportation
District transportation firm reports were mixed during the reporting period. Port contacts noted continued growth in container volumes, though at slightly lower pace. Inland waterway contacts reported modestly higher demand year-over-year. Freight forwarders saw strong growth in volume and revenue driven by e-commerce shipments. However, some ocean carriers noted that demand was down from year-ago levels and lower than 2019 expectations. Air cargo activity reportedly weakened as world trade growth decelerated amid trade tensions, Brexit uncertainty, and slowing economic activity, especially in European and Pacific arenas. Railroads continued to see substantial year-over-year decreases in overall traffic; intermodal volumes also fell.

Banking and Finance 
Though still healthy, District banking conditions softened slightly. Loan growth at financial institutions continued, albeit at a slower pace, particularly for consumer and commercial real estate lending. Net interest margins declined modestly due to lower loan growth, lower yields on loans, and increased competition for deposits. Nonperforming assets, however, remained steady and near historic lows.

Energy 
The District’s petrochemical sector continued to experience strong demand and high levels of output. Contacts cited numerous chemical and petrochemical expansion projects initiated over the reporting period and project starts are expected to accelerate through year-end. However, some contacts expressed that Chinese tariffs on U.S. liquefied natural gas (LNG) exports created uncertainty among global firms pursuing new LNG processing plants or expansions in the U.S. Still, exports of most energy products to global markets continued to grow. Gulf Coast refiners indicated that crude refining capacity continued to grow and investment in pipeline infrastructure to transport oil and gas products to District refiners remained at elevated levels. Utilities contacts reported that while growth will continue to soften because of customers’ efficiency gains, the industry has initiated extensive capital investment, including industrial transmission expansions; various renewable energy projects, notably solar plants and wind farms; new power plants; and smart grid investments.

Agriculture
Agricultural conditions across the District were mixed. Recent reports indicated much of the District was drought-free although parts of Alabama, southern Georgia, the Florida panhandle, and Tennessee experienced abnormally dry to moderate drought conditions. The District’s cotton, soybean, peanut, and rice crops were mostly on par with five-year planting averages. Florida orange forecast was down in June from the prior month’s forecast, but was higher than the last two season’s production levels. On a year-over-year basis, prices paid to farmers in May were up for cotton but down for corn, rice, soybeans, broilers, and eggs.

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

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