January 18, 2023
Summary of Economic Activity
Sixth District economic activity grew at a gradual pace from mid-November through December. Labor market pressures eased somewhat, but wage pressures persisted. Most nonlabor cost increases moderated; however, food prices climbed, and freight costs remained elevated. Some firms' pricing power diminished. Holiday sales at District retailers were strong, and auto sales rose. Leisure travel activity was robust, and bookings for the first half of 2023 were strong. Housing inventory levels rose as home sales declined. Commercial real estate conditions weakened. Transportation activity continued to decline. Manufacturing demand remained steady. Deposit growth at financial institutions slowed, but loan growth was steady. Energy production remained strong, but winter weather caused storm-related outages and damage to powerlines. Agricultural conditions were mixed.
Labor Markets
Labor market pressures eased further since the previous report, but firms continued to describe labor markets as tight. Several contacts noted that entry-level roles were easier to fill; hiring for skilled positions remained challenging. Staffing was still a top concern and firms were largely intent on keeping talent even if demand slows; most indicated that they would strongly resist layoffs and would instead right size via attrition. Several employers required employees to return to the office and have become less flexible with remote work arrangements.
Most employers reported persistent upward wage pressures. Many anticipate wage growth will remain elevated in 2023 but will ease somewhat. Several noted that they would be creating more equitable pay across their organization based on market survey results. Some contacts indicated that overall pay raises would be modest, but bonuses would be used to retain and recruit specific talent.
Prices
Sixth District contacts noted most nonlabor input cost increases moderated over the reporting period, though price levels remained historically elevated. While domestic freight cost increases persisted, largely due to higher energy and labor costs, shipping container rates returned to near-"normal" pricing. Food prices rose significantly. Many firms described diminished pricing power due to elevated inventories and/or increased price sensitivity from customers. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth decreased in December to 3.8 percent, on average, down from 4 percent in November. Firms' year-ahead inflation expectations also decreased from 3.3 percent in November to 3.1 percent in December, on average.
Consumer Spending and Tourism
Retailers reported solid and healthier-than-expected holiday sales; however, many offered heavy discounts as consumers looked for deals. Some contacts noted that lower-income consumers continued to trade down and shifted to non-discretionary spending. Those stores catering to higher-income customers noted ongoing strength in demand. Auto dealers saw an increase in sales volumes compared to the last report as new and used car inventories improved.
Tourism and hospitality contacts reported strong demand for leisure travel throughout the holiday season. Hotel occupancy and attendance at tourism venues were greater than 2019 levels. Although bookings were strong through the second quarter of 2023, contacts expressed uncertainty over the second half of the year.
Construction and Real Estate
Despite more moderate price growth and a recent drop in mortgage interest rates, housing demand in the Sixth District continued to deteriorate. Sales fell sharply across the region and inventory levels rose. Most homes sold for below the asking price and the number of days on market reached near pre-pandemic levels. Builders continued to reduce new home construction in response to declining demand. According to builder contacts, demand in the entry-level and second home markets was the weakest and cancellation rates remained high. A significant share of builders cut prices and increased incentives to attract buyers.
Commercial real estate (CRE) contacts reported weakening market conditions in lower-tier office, luxury multifamily and owner-operator retail segments. The industrial sector was robust; however, contacts voiced concerns over future activity levels. The downward trend in the office sector has eased some as more employers require their staff to return to the office; however, heightened levels of sublease space remained an impediment to market recovery. A greater number of contacts shared concerns over declining CRE values as the bid-ask spread remained wide. More instances were noted of slowing or negative net operating income and rent growth. Contacts continued to report occurrences of declining asset prices and buyers seeking greater concessions.
Transportation
Transportation activity continued to slow from unsustainable pandemic levels. While some southeastern ports reported that breakbulk cargo volumes rose as shippers sought alternative ways to move cargo amid supply chain disruptions, container traffic decreased and was characterized as a return to more sustainable growth. Trucking tonnage also fell, and housing-related freight was noted as particularly weak. Railroads experienced declines in intermodal shipments of packaging materials, chemicals, and metals. Logistics firms involved in moving and relocation, "big and bulky" delivery services, and warehousing saw year-over-year volume declines as consumer and housing demand softened and firms reduced inventory levels. Most transportation contacts expect additional weakening of demand in 2023.
Manufacturing
District manufacturers noted steady demand and positive revenue growth, driven primarily by the ability to raise prices to offset higher input costs; however, margins were described as remaining pressured or even declining. Some firms reported plans to right size inventory levels, reverting back to "just-in-time" inventory management compared to pandemic-era "just-in-case" inventory approaches. Several manufacturers cited inflation and a strong dollar as headwinds in the coming year.
Banking and Finance
Banking contacts reported steady loan growth for a majority of portfolios, except for farmland and consumer loan growth remained positive. Yet, institutions cut investments in mortgage-backed securities as unrealized losses in securities portfolios increased. Deposit growth shifted primarily to time deposits as growth in all other deposits declined in recent weeks and institutions increased short-term borrowing to fund ongoing loan growth. Asset quality metrics showed a steady increase in the level of nonperforming assets.
Energy
Oil and gas contacts continued to report strong activity and increased production, although the pace of growth slowed over the reporting period. Gulf Coast refining was impacted by the winter storm that swept across the U.S. in late December, causing regional utilization to fall approximately 20 percent, though long-term damage to infrastructure was minimal. Utility providers across Sixth District states reported winter storm-related outages from damage to powerlines and surging demand. Energy contacts continued to describe ongoing investments in renewable projects, particularly hydrogen, carbon capture and storage, and offshore wind-energy development projects.
Agriculture
Agricultural conditions were little changed from the previous report. Demand for poultry dropped slightly but remained strong; demand for cattle and timber, as well as for some row crops, such as corn and soybeans, held steady. Florida citrus yields were down notably due to damage from Hurricane Ian. The cotton market continued to soften amid decreased demand from textile mills. Supply chain disruptions persisted, with several contacts reporting delays in receiving machinery and parts.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.aspx