Beige Book Report: Atlanta
September 7, 2022
Summary of Economic Activity
The Sixth District economy expanded slightly from July through mid-August. Pressures in the labor markets lessened somewhat, but overall, the labor market remained tight amid persistent wage pressures. Certain nonlabor costs fell, but remained elevated as compared with pre-pandemic levels. Retailers reported declining unit sales and evidence of consumers trading down from brand names to private label products. Demand for automobiles was strong, but inventory shortages continued to hinder sales. Leisure travel activity slowed while business travel continued to recover. Demand for housing continued to fall as affordability further declined. Commercial real estate activity remained mixed. Manufacturing activity was robust, though some slowing was reported. Transportation activity varied. Deposit growth continued to slow at financial institutions, but loan growth improved.
Labor Markets
Sixth District labor market pressures eased modestly since the previous report, as several employers reported an uptick in applicants and some lessening in turnover. However, conditions remained tight and several noted ongoing automation efforts designed to reduce labor reliance. Housing affordability and higher costs of living were said to be limiting the pool of workers in some areas. Some indicated that retention had improved in response to growing economic uncertainty. No business contacts reported layoffs, but several said that they had begun to shrink headcount through attrition, reduce open positions, and fill positions more slowly. Several firms anticipate layoffs amid slowing demand later this year and into next year.
Most employers reported persistent upward wage pressure. Many firms tried to offset higher wages with bonuses and per diems to attract workers and incentivize attendance and productivity. Enhanced benefits options were also offered. The outlook for wage growth was mixed; some expect wage growth to remain strong, while others anticipate it will subside over the next year.
Prices
Freight costs continued to slowly decline over the reporting period, and costs for some inputs like copper, lumber, and steel softened from pandemic highs but remained elevated. Numerous contacts reported diminished pricing power, either through pushback in negotiations or reduced demand, and there was widespread uncertainty over near-term inflationary impacts on demand. Gasoline prices also moderated, but rent, utilities, and food prices continued to climb. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth remained unchanged at 4.3 percent, on average. Firms' year-ahead inflation expectations decreased to 3.5 percent, on average, from 3.7 percent in July.
Consumer Spending and Tourism
District retailers reported declining unit sales and an increase in consumers trading down from brand name to private label products, attributed to diminishing real discretionary income. Automobile dealerships continued to report healthy demand for new vehicles, but sales were muted by inventory shortages. Most retailers are cautiously optimistic for the upcoming holiday season.
Travel and tourism contacts experienced slowing demand for leisure travel, described as a return to more "normal," pre-pandemic levels. Business travel and convention activity continued to recover with healthy bookings for the fall, although still below 2019 levels. Contacts are optimistic that travel will continue to normalize throughout the remainder of the year.
Construction and Real Estate
Housing markets remained challenged across the District due to rising home prices and interest rates, declining affordability, and inventory shortages. Although some markets experienced a sharp increase in home prices over the past year as housing demand in these regions exceeded supply, overall homebuyer sentiment throughout the District dropped sharply, mortgage originations and pending home sales declined compared with a year ago, and the share of homes on the market with a reduced asking price rose. Though construction supply chain issues eased and cost inflation slowed, homebuilders experienced increased contract cancellations as rising interest rates priced more buyers out of the market.
District commercial real estate (CRE) activity was mixed. Contacts reported healthy conditions in the multifamily and industrial markets, but voiced concerns that negative sentiment associated with a potential economic slowdown could impact activity. Slowing occurred in certain segments of retail CRE as some contacts reported a growing number of restaurant closings. Contacts also noted increasing concerns about possible declining CRE values as the bid-ask spread widened, pools of buyers diminished, the number of buyers seeking concessions grew, and prices declining in some of the less robust property types.
Manufacturing
District manufacturers continued to report strong demand, though a few noted a slowing of activity since the previous report. Some improvement in delivery times was mentioned. However, according to the Atlanta Fed's Business Inflation Expectations Survey, more than half of manufacturing respondents experienced moderate or severe supply chain disruptions causing shortages of supplies or inputs. Roughly two-thirds of manufacturers surveyed noted concerns about a potential recession due to inflation, rising interest rates, stock market volatility, and the Russia-Ukraine conflict. Most manufacturers expect sales over the next twelve months to be similar or slightly higher than pre-pandemic levels.
Transportation
Activity was mixed for District transportation firms. Container ports continued to see record container volumes. Inland barge companies reported solid coal exports and refined petroleum product shipments. Trucking activity slowed for some carriers, and freight brokerages saw spot market rates drop and slowing demand for flatbed services. Rail activity declined as domestic intermodal freight, lumber shipments, and international chemical volumes fell.
Banking and Finance
District banking conditions were steady. Loan growth improved despite higher interest rates, while growth in securities portfolios declined, reflective of slowing deposit growth. Financial institutions reported strong asset quality metrics, although the level of nonperforming assets increased slightly. Provisions for credit losses also increased. Improved earnings were driven by higher net interest margins offsetting lower noninterest fee income.
Energy
Energy contacts indicated that the supply of crude oil and gasoline did not keep pace with demand over the reporting period. Oil refining utilization eased slightly, which contacts attributed to some refiners completing previously delayed maintenance projects. However, refiners experienced strong margins and are expected to rebuild product inventories over the balance of the year. Natural gas production trended up and exports soared. Utility contacts reported rising demand for power, driven by hot weather and strong growth in retail and commercial customers; utilities also experienced higher fuel and power costs, resulting in higher utility bills for customers. Providers continued to diversify power generation systems, including investing in renewables, particularly solar and wind.
Agriculture
Demand for agricultural products remained strong. Hot weather and dry spells damaged crop yields, particularly corn, in many areas of the District. Prices paid to farmers were elevated overall but fell somewhat for corn and milk. Restrictions on imports from China led to higher demand for domestic cotton. Demand for poultry exceeded supply, while the beef market held steady. Long lead times for machinery and parts forced many farmers to use decommissioned machinery and some small farms suffered crop losses due to inoperable equipment.
For more information about District economic conditions visit: https://www.atlantafed.org/economy‐matters/regional-economics.aspx