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Beige Book Report: Atlanta

December 4, 1991

Overview
In early November, reports on the District economy indicated that activity was again sluggish and showed the same uneven pattern that has persisted since last spring. Retailers saw relatively good sales in the past month, but they reported that they are concerned about the shorter-than-usual shopping season. Auto sales were generally unchanged from previous months' and year-ago levels. Manufacturing activity has been slow in construction-related industries, but has shown positive signs in food processing and packaging. Banking contacts report only slight increases in loan demand over the past month and add that credit standards remain unchanged. Residential real estate activity is strong only for homes in the lower price ranges.

Retail Sales
After accounting for normal seasonal patterns, most retail contacts reported an increase in nondurable goods sales, adjusted for price increases, during the first half of November, partly as a result of early discounting. They see little evidence of overall sales gains in consumer durables. Retailers retain cautious expectations for the holiday season and are concerned about the sustainability of recent sales growth. At present, they do not expect holiday sales in real terms to exceed weak year-ago levels despite active discounting. Contacts cite both the shorter holiday shopping season and anemic consumer confidence as reasons for this pessimistic outlook. Inventories remain lean and could become a constraint if early November's sales growth is sustained.

None of the auto dealers contacted reported improvement in sales from previous months' or year-ago levels even with the arrival of new 1992 models. Most saw flat year-over-year sales.

Manufacturing
Reports on factory activity pointed to softness. Weakness persists in construction-related industries where export orders are typically not significant. Carpet mill contacts say that slow commercial construction continues to depress the industry, and add that further layoffs are possible in the near future. Weak demand for consumer durables continues to hurt a regional producer of steel for appliances. Furniture manufacturers also report declining shipments in recent months. Consistent with these reports, transport companies have seen weak lumber, gypsum, and appliance shipments. Apparel producers characterize current orders as sluggish and report concerns that a poor Christmas buying season will increase retail inventories and cause them to reduce orders in the first quarter of next year. A contact in a printing and publishing firm noted that corporate cost cutting and reductions in magazine advertising continue to affect adversely the industry.

More positively, a producer of printed materials for food packaging has seen strength in new orders and production over year-ago levels and is currently planning a major capital expansion project. Several food processors also report increased new orders and shipments. Another producer of paper products and boxes expects currently slowing orders to stabilize in the first quarter of next year. Most contacts continue to carry lean inventories, and have no plans for additional inventory accumulation.

Financial Services
According to most banking contacts, loan demand increased only slightly in the past month and remains below year-ago levels. They complain that it is difficult to obtain high quality loan applications. Much of the reported increase in demand was attributed to market share gains by the reporting banks as borrowers moved from troubled or merged institutions.

On the other hand, one banker said that his institution may have tightened credit standards too much and was losing market share as a result. Auto dealers and construction contractors continue to report that credit is difficult to obtain.

Construction
Most realtor contacts had seen home sales levelling in their typical seasonal pattern in October and early November. Homes in the lower price range continued to report the most sales activity as lower mortgage interest rates stimulated first-time home buyers. Sales of higher priced homes remained sluggish, forcing sellers to reduce prices. Some contacts noted a strengthening in multifamily leasing and rental rates; however, they saw little new construction of multifamily residences. Meanwhile, several contacts report small gains in the activity of surviving home builders in the past several months.

The commercial real estate market has shown little change in this reporting period. Commercial office space remains overbuilt in many cities, with effective rental rates depressed, and little or no improvement in absorption. Corporate consolidations and mergers continue to put additional supply on the market and our contacts are generally unsure whether it has hit bottom.

Wages and Prices
For the most part, wage costs and materials prices remain relatively stable with adequate supplies of labor, especially in the service sector. Recently reduced raw materials prices are helping cut the cost of production for textile and apparel firms, but contacts do not expect these savings to be passed on to consumers. Instead, they plan to use these savings to offset increases in other costs of production, particularly health care benefits.