Beige Book Report: Atlanta
June 2, 2021
Summary of Economic Activity
Economic activity in the Sixth District expanded at a moderate pace, on net, from April through mid-May. Demand for labor strengthened, though shortages among low-skilled workers persisted. Wage pressures increased for positions in high demand. Some nonlabor costs continued to rise, and pricing power remained mixed. Retail sales activity increased, and auto sales rose more than expected. Hotel occupancy levels rose due to robust leisure travel activity; however, hotels dependent on business travel continued to struggle. Demand for housing remained strong and home prices continued to rise. Conditions in commercial real estate were mixed. Manufacturing activity strengthened as new orders and production levels rose. Conditions at financial institutions were stable, and consumer loan demand grew slightly.
Employment and Wages
Overall employment in the District increased since the previous report. Contacts reported strengthening demand for labor as economies in the region began to reopen. Demand was strongest among lower-skilled positions, and employers reported that labor availability among that segment was very low. Shortages were also noted among skilled trade workers, nurses, IT workers and commercial drivers. Many employers continued to state that expanded unemployment insurance benefits and stimulus payments were keeping would-be workers on the sidelines; others indicated that childcare, transportation issues, and the inability to guarantee hours were key factors in preventing potential workers from seeking employment. Employers indicated there was a great deal of churn among low-skill, low-wage positions, and many reported that labor shortages had a limiting effect on services to customers, as well as the production of goods, which is contributing to supply chain disruptions. Several contacts anticipate that labor shortages will abate this fall but there is a great deal of uncertainty around how much supply will materialize. For firms with limited supply of labor in their markets, opportunities to offer remote work for some positions have removed geographic barriers, allowing employers broader access to talent.
Wage pressure picked up from April through mid-May, and upward pressure was most notable among low-skilled positions. Within this segment, reports of wage increases were more widespread with referral and signing bonuses becoming increasingly more common. Among the more skilled positions, wage increases were more modest.
Prices
District contacts reported that input costs, particularly for lumber, steel, transportation, and shipping remained at elevated levels. Increased costs in construction materials and labor slowed business expansion projects. Reports on pricing power were mixed, but many contacts cited the removal of promotional pricing to maintain margins. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs increased significantly to 2.8 percent on average in May. Year-ahead expectations increased to 2.8 percent in May, up from 2.5 percent in April.
Consumer Spending and Tourism
District retailers continued to report healthy sales activity over the reporting period, driven largely by tourism. Although auto production and inventory levels fell due to tight chip supplies, sales rose well above forecasted levels for April.
Travel and tourism contacts across the District reported continued strong demand in leisure travel, with hotel occupancy levels in the 80-90 percent range. Contacts noted an uptick in bookings for business travel, conventions and special events planned for the second half of the year. International travel activity continued to be constrained as vaccine distribution in other countries remained slow.
Construction and Real Estate
Housing activity throughout the District remained strong over the reporting period. Relatively low interest rates and a shift from renting towards home buying remained primary drivers of demand, as well as an increase in buyers moving to the region from higher cost markets in the Northeast and West Coast. The persistent shortage in existing home inventory levels resulted in further home price appreciation. In some markets, contacts reported that homes were frequently selling above the asking price. Heavy demand from investors, particularly for newly constructed homes, was also noted to be contributing significantly to price pressures and reduced inventories for home-owner purchasers. Homebuilders noted rising cost pressures as labor and material costs escalated, and many reported efforts to limit sales by raising prices. Contacts noted that housing affordability is becoming more of concern.
Reports on commercial real estate (CRE) activity were mixed. Conditions in the retail and hotel segment improved modestly, as contacts reported increased consumer traffic amid further re-openings of malls, stores, and hotels. Occupancy at lower-priced hotels rose, though higher-priced hotels continued to experience challenges as business travel remained muted compared with pre-pandemic levels. Activity in the multifamily sector improved, even in some of the hardest hit, high-density areas. The office sector continued to face headwinds as many employers remained cautious about future space needs. Negative absorption and new construction are pushing office vacancies upward. Banks reported that capital was available, and competition accelerated among lenders for a small segment of CRE loans.
Manufacturing
Reports on manufacturing activity were largely consistent with the previous report, with contacts noting continued increases in new orders and production levels. Supplier delivery times slowed considerably, and finished inventory levels fell somewhat. Expectations for future production levels remained positive, with nearly two-thirds of contacts expecting higher levels of production over the next six months.
Transportation
District transportation activity expanded since the previous report. Contacts at several ports reported record volumes of containerized imports, and some noted significant investments in infrastructure to grow container capacity. Railroad contacts saw substantial increases in intermodal shipments and total traffic compared with pre-pandemic levels. Trucking firms reported double-digit increases in freight volumes; however, driver shortages persisted. Impacts on freight movements from the shutdown of the Colonial Pipeline were noted as immaterial.
Banking and Finance
Conditions at District financial institutions remained stable over the reporting period. Earnings grew due to lower provisions for loan loss expenses and higher noninterest income, which improved capital. Net interest margins stabilized but remained compressed due to the low interest rate environment. Deposit levels continued to be elevated. Some loan growth returned over the last six weeks, particularly in consumer loans, although residential loan growth slowed due to lower housing inventories, increased cash purchases, and a loss of market share for residential mortgages to nonbanks. Increases in securities portfolios continued to outpace loan growth. Past due balances in loan portfolios held steady despite ongoing declines of loans in forbearance.
Energy
District energy contacts experienced some operational disruptions resulting from the Colonial Pipeline shutdown, including fuel access and delivery tightness that required fuel trucks to be pulled from surrounding markets to serve impacted areas. Production slowed at oil refineries that were unable to offload fuel. Nonetheless, optimism about oil and gas demand among energy contacts continued to grow as economies across the U.S. reopened. Oil and gas exploration and production picked up slightly since the previous report, and contacts expect activity to accelerate in the coming months. Renewable energy projects increased as investment dollars continued to flow into windfarms, solar power plants, and battery storage. Utilities contacts indicated that commercial activity picked up, and residential demand remained strong.
Agriculture
Agricultural conditions remained mixed. Widespread rain across much of the District resulted in abnormally moist to excessively wet conditions while the southern tip of Florida experienced abnormally dry to moderate drought conditions. Most of the region's cotton and peanut crops were behind the five-year planting average, while soybean planting was mixed, and Tennessee's corn crops were mostly on par with the five-year average. On a month-over-month basis, the production forecast for Florida's orange crop was unchanged in May while the grapefruit production forecast was down; both forecasts were below last year's production levels. The USDA reported year-over-year prices paid to farmers in March were up for corn, cotton, rice, soybeans, and broilers, but down for eggs and milk; cattle was unchanged. On a month-over-month basis, prices increased for corn, rice, soybeans, cattle, broilers, eggs, and milk but decreased for cotton. Contacts reported some supply chain challenges, including the ability to acquire materials and equipment, higher input costs, and tighter labor availability. Several contacts noted land values increased.