March 4, 2020
Summary of Economic Activity
Sixth District business contacts reported that economic activity grew modestly from January to mid-February, and the outlook remained positive, on balance. Reports of tightness in the labor market persisted. A majority of firms noted a steady pace of wage growth outside of specialized jobs and those in high demand. Nonlabor costs continued to increase modestly. Retail and automotive contacts noted flat sales growth over the reporting period. Hospitality contacts saw year-over-year increases in the number of visitors to the region. Residential home prices remained steady and demand was healthy. Commercial real estate conditions were solid. Overall manufacturing activity weakened as new orders and production levels declined. District financial institutions reported stable conditions; loan growth, while positive, moderated somewhat.
Employment and Wages
A majority of firms continued to report tight labor market conditions. A shortage of workers for lower-skilled positions, as well as for some specialized occupations such as software developers, nurses, and engineers, was noted. The continued lack of available construction labor was said to be lengthening project timelines. Many employers noted productivity concerns as the lack of available skilled labor required more in-house training and supervision.
Most contacts expect overall wage growth to remain steady, with larger wage increases going to positions in high demand or those deemed critical.
Prices
Most contacts continued to report modest increases in nonlabor costs while tariff concerns lessened over the reporting period. Some contacts noted having pricing power with select goods and services, but most reported difficulty in passing through rising costs. The Atlanta Fed’s Business Inflation Expectations survey showed year-over-year unit costs were up 1.5 percent in February. Over the next twelve months, survey respondents indicated they expect unit costs to rise 1.7 percent, and the majority of firms expect overall costs to put moderate upward pressure on prices.
Consumer Spending and Tourism
On balance, retail contacts and auto dealers reported flat sales growth since the last report. Contacts from both segments expect an increase in uncertainty in their industries over the next few months due to sourcing constraints for merchandise and auto parts from China.
District travel and hospitality contacts reported a healthy start to the year, with an uptick in the number of visitors to the region over the first five weeks of the year compared with the same period last year. Although no material impacts have yet been seen, tourism contacts are closely watching for potential negative effects on the industry resulting from the coronavirus outbreak.
Construction and Real Estate
Low mortgage rates and heathy job growth continued to support demand for housing in the District. Price appreciation was firm while single-family sales activity was constrained by limited inventory and lower levels of housing starts. Despite low interest rates, concerns over affordability remained as many expect price appreciation to continue and inventories to remain limited. Although mortgage loan quality remained stable, some markets saw a slight uptick in delinquencies over the past year and a rise in the share of mortgages with higher debt-to-income ratios.
Commercial real estate (CRE) contacts reported steady leasing and sales activity throughout the District during the reporting period. Data indicated that sector vacancy rates increased slightly across most major markets in the District; however, contacts noted a recent acceleration in leasing and sales inquiries. Local market conditions, such as growth in population and jobs, continued to positively influence CRE activity. Overall, most CRE segments experienced positive dynamics as rents continued to grow at a modest pace. Contacts noted that growing construction costs were impacting the start of some new projects, although capital was readily available via banks and non-bank entities for financing CRE projects. Non-bank entities remained aggressive in financing both construction and stabilized CRE projects. Modestly growing amounts of leverage and some loosening in underwriting standards were reported.
Manufacturing
Manufacturing firms reported a decline in overall activity. Contacts indicated that new orders and production levels decreased since the last reporting period, while purchasing managers indicated little to no change in supply delivery times. Finished inventory levels continued to decline, but at a somewhat slower pace since the previous report. Optimism for future production levels was reflected, however, in over one-half of contacts expecting higher levels of production over the next six months.
Transportation
District transportation firms reported varying levels of activity since the previous report. Air cargo contacts noted healthier year-over-year volumes and revenues from increased exports. However, due to the coronavirus, cancelled flights to China have reduced air cargo capacity significantly, which is expected to negatively affect first quarter revenues. Port contacts saw continued strength in container traffic, but weakness in breakbulk cargos, particularly steel and aluminum, owed to tariffs. Railroad contacts reported sustained declines in shipments of industrial freight, mostly non-metallic minerals, metallic ores and coal; intermodal shipments were also down from year-earlier levels. Most transportation contacts remain somewhat confident in their outlook, despite geopolitical uncertainties.
Banking and Finance
Conditions at financial institutions remained stable. Margins at banks were steady as lower loan yields were offset by a decline in interest expense. Loan growth was positive but continued to moderate as demand for commercial and industrial loans weakened, and banks tightened underwriting standards for credit cards and vehicle lending. Loan growth was lowest among smaller community banks. Asset quality remained strong, as there was little change in the level of nonperforming assets.
Energy
The continued rise in global supplies of crude oil and liquefied natural gas (LNG) was further augmented by slowing demand from China in the wake of the coronavirus outbreak. Chemical plant and refinery expansions continued to pick up across the District. Utilities companies reported steady demand in commercial and industrial segments, as well as increased infrastructure investments, largely in electric segments, but also in renewables units and nuclear projects. Solar plant construction projects, particularly in Florida, continued to develop.
Agriculture
Agricultural conditions remained mixed. Most of the District remained drought free, but recent heavy rain resulted in some flooding conditions. On a month-over-month basis, the February production forecast for Florida's orange crop was down while the grapefruit production forecast increased; both forecasts remain ahead of last year's production. On a year-over-year basis, prices paid to farmers in December were up for corn, soybeans, beef, and milk but down for cotton, rice, broilers, and eggs. On a month-over-month basis, prices increased for corn, cotton, soybeans, beef, broilers and milk but declined for rice and eggs.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics