Beige Book Report: Atlanta
May 3, 1989
Overview
Firms headquartered in the Southeast report that business activity
continues to move ahead at a moderately healthy pace. Some shortages
of both skilled and unskilled workers are reported by firms in both
the manufacturing and service sectors. Most contacts, however, say
that sufficient labor is available and continue to report that wage
rates are rising at a 3-5 percent range. Increases in prices of
materials and final products are showing some acceleration,
particularly where imported goods are a significant component. At
the same time, order backlogs appear to be easing a bit and vendor
delays as well as inventories are said to be generally acceptable
relative to sales. Capital spending plans of businesses, although
decelerating, remain stronger than a year ago; there are still more
reports of spending for modernization rather than for outright
expansion. Loan growth is weakening in both the consumer and real
estate categories. Delinquencies are not a major problem but real
estate lenders express concern about housing and commercial
properties in overbuilt areas.
Labor Markets
Wage increases remain mostly in the 3-5 percent range although there
are a few notable exceptions. One manufacturer reports wage hikes in
the 10 to 15 percent range for low skilled workers In certain
fields; the wage increase is estimated to be less costly than the
turnover that would occur without it. Welders, pipe fitters,
machinists, engineers, and nurses are reported to be in short supply
and are contributing to upward wage pressures in affected
businesses. An acute shortage of nurses in the Southeast is expected
to further escalate hospital costs.
Prices
Most input and product prices are said to be rising at a faster pace
than last year at this time, but reported rates of increase vary
widely by industry. A major distributor of auto, office machine and
industrial parts notes that prices have been accelerating and
pressures are the most intense in three years. Year-to-date in the
firm's industrial supply division, price increases have averaged
about 6 percent and forecasts are for some acceleration for the
remainder of the year. Back orders at suppliers are huge and
delivery delays have been severe although some improvement has been
noted in the last few weeks.
At the other extreme, prices of construction materials and products associated with the slowing building industry are generally feeling little or no upward pressure. The major exception is the price of cement which has increased 10 to 12 percent so far this year. Imported cement is primarily responsible for the upward price pressure. On the other hand, demand is slowing for lumber and additional softness is anticipated because of the slowdown in residential housing.
In agriculture, prices of vegetables have moderated with the regrowth of fresh vegetable crops since the February freeze. However, prices of broilers and eggs are holding at relatively high levels. The broiler industry is benefiting from rapid demand growth in the fast food industry, which is supporting prices at a highly profitable level for all chicken producers. Feed costs, though higher than a year ago, have not risen recently and there is hope that prospects for larger grain crops in 1989 may soon cause feed prices to decline. Last year's heavy losses drove egg producers out of the business reducing supplies and contributing to current high egg prices.
Capacity Utilization
Capacity constraints appear to be easing a bit throughout the
Southeast. One capital equipment manufacturer notes that the rise in
interest rates has caused distributors to trim inventories of
products from a typical 4 and 1/2 months supply to a 1 and 1/2
months supply. This has resulted in a slowing pace of new orders for
a formerly very active product line and is, in turn, reducing
pressures to expand capacity. A number of other respondents note
that new capacity is now coming on line reflecting past expansion
decisions but few new expansions are planned for this year. A pickup
in utilization of idle capacity is now anticipated for a number of
energy producers. Spokesmen relate that an improvement in
expectations for the oil industry over the long run is generating
plans for some renewed activity in oil exploration. The natural gas
industry is becoming especially active in response to brighter
market prospects.
Investment
Capital investment appears to be slowing across the region. Some
contacts state that uncertainty regarding the possibility of a
recession by next year is causing reluctance in major expansion
decisions. A medical services firm states that investment is being
cut back from the levels of recent years partially because of
efforts by businesses, insurers, and particularly the federal
government to manage reimbursements of medical expenses more
closely. For example, Medicare's reimbursement for capital
expenditures has declined 10-15 percent this year and it is
speculated that another 10 percent reduction is in the offing.
Most new capital investments are expenditures to upgrade machinery and production techniques which will enhance the output from the currently employed work force. In agriculture, crop farmers are sharply expanding purchases of machinery and equipment mostly to replace worn items that were held in service during the low-income period over the past several years. The broiler producing and processing industry is the major exception to the general trend. New processing plants are being built to respond to the brisk growth in the nationwide demand for chicken products. A significant investment to expand grower facilities is also required to supply the new processing capacity.
Credit Situation
Delinquency rates and defaults on real estate loans have continued
to rise in the District although the extent of the problems is not
yet considered serious. Several lenders report that loan volumes are
flat or down reflecting the slowdown in both residential and
commercial construction. A few lenders register concern that
problems with large real estate development projects could become
more severe in an environment of high vacancies and rising interest
rates.