July 12, 2023
Summary of Economic Activity
The Sixth District economy grew at a measured pace from mid-May through June. Labor availability and retention improved, and wage pressures eased. On balance, nonlabor costs continued to moderate and pricing power was mixed. Retail sales softened for discretionary items, but consumer spending on essentials remained solid. Auto sales were strong. Domestic leisure travel declined while business and international travel rose; cruise demand was robust. Housing demand remained durable; home inventories fell, and house prices rose. Commercial real estate conditions were mixed. Transportation activity slowed. Manufacturing experienced strong demand. Loan volume continued to rise, but deposit growth slowed. Activity in the energy sector was stable. Agriculture demand slowed.
Labor Markets
The majority of Sixth District contacts reported that labor availability and retention improved, and most firms continued to hire. However, challenges filling corporate roles, skilled construction, and healthcare positions were noted while, for some firms, entry-level hourly service roles were easier to fill. A number of manufacturers remained extremely short-staffed and utilized overtime to run at capacity, while other manufacturing firms reported stabilized employment levels and reduced overtime to align with softer demand. Among those firms experiencing weaker demand, most remained reluctant to lay off staff that they had endeavored to attract and retain, but several slowed the pace of hiring except for exceptional candidates or relied on attrition to shrink their workforce.
Overall, wage growth remained higher than pre-pandemic levels. Most contacts reported that wage pressures continued to ease, and the majority said the pace of increases had begun to moderate, in line with expectations.
Prices
Nonlabor costs continued to stabilize over the reporting period. However, several Florida contacts noted significant increases in insurance costs. The cost of food products moderated, aided by decreases in freight and overland delivery costs. Construction input costs also declined, with commodities like steel and lumber falling to or near pre-pandemic levels. While wholesalers increasingly reported pushback from clients on price increases, consumer prices remained elevated as retailers saw minimal impact to demand. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth was 3.1 percent, on average, in June, down significantly from 3.5 percent in May. Firms' year-ahead inflation expectations also decreased in June to 2.7 percent, on average, from 2.9 percent in May.
Consumer Spending and Tourism
Retailers described consumers as more value conscious since the previous report. Discretionary spending on items such as clothing, electronics, and recreation has moderated amid a behavior shift to fewer store visits and less impulse buying. However, spending on food and beverages, household essentials and healthcare necessities rose. Retailers expect that demand will stabilize in the second half of 2023. Automobile dealers reported that sales remained resilient, although consumers have begun to trade down to lower price-point models.
Tourism and hospitality contacts reported further softening demand for domestic leisure travel, while international, group, and business travel strengthened year over year. Hotel occupancy across most destination beach resorts fell since the previous report and those hoteliers reported some diminished pricing power. Demand for cruise travel and on-board spending remained robust.
Construction and Real Estate
Housing demand remained strong throughout the District amid declining existing home inventories. Home sales in many metro areas rose to near seasonal norms, creating persistent supply shortages. Home prices experienced steady upward pressure on a monthly basis as a result of low supply. Limited existing home inventories drove demand for new home construction. Though down from last year, the share of builders offering incentives to attract homebuyers, such as interest rate buydowns, remained high. Home ownership affordability throughout most markets in the District worsened as home prices and mortgage rates trended higher.
Contacts reported mixed conditions in the commercial real estate (CRE) sector. While modestly decelerating, general retail and industrial activity remained at healthy levels. The multifamily sector cooled as demand for luxury/higher-priced units deteriorated. While declining overall, office sector conditions were mixed; activity in newer buildings was solid, while occupancy in older buildings declined as tenants vacated to newer structures. Additionally, some older buildings have incurred sizeable declines in value. More contacts reported concerns regarding financing, as some banks heightened underwriting standards and reduced funding commitments. Contacts also noted more uncertainty amid declining CRE values.
Transportation
Transportation activity slowed further over the reporting period. Ocean carriers and ports reported declines in container traffic, owing to inventory destocking by retailers and weaker global demand. District railroads reported significant decreases in year-over-year freight volumes, including double-digit decreases in intermodal shipments. Logistics firms reported revenues from warehousing were flat compared with 2022; higher prices helped to offset volume declines.
Manufacturing
Many manufacturers reported healthy business conditions over the reporting period. Some contacts noted a slight decrease in demand, which many characterized as a normalization, and most firms reported robust pipelines of orders. While lead times and availability of many inputs have improved, firms noted lingering shortages of some inputs, particularly electrical switchgears. Auto manufacturers saw strong demand but noted signs of trade-downs to less expensive vehicles and expect to see some slowing in the coming months.
Banking and Finance
On balance, growth slowed at District financial institutions, led by a slight decline in the deposit base in recent months as interest rate increases continued to encourage customers to move deposits into higher-yielding alternatives. To help offset slowing deposit growth on a year-over-year basis, institutions steadily increased interest rates on deposits. Institutions reported continued loan growth, primarily residential, construction, and development, which was offset by a decline in securities portfolios. Many of the financial institutions have yet to report significant increases in delinquencies, though performance varied widely. Contacts expect asset quality to normalize over the coming quarters.
Energy
Contacts reported that most energy segments were flat or up over the reporting period. While oil and gas production continued, regional output was generally unchanged. Refiners described high utilization to meet summer demand for gasoline. Chemical producers noted strong demand for products that support the renewables sector, which continued to experience considerable growth in the manufacturing of batteries, solar cells, turbines, renewable fuels, and more. Utility providers reported commercial segment growth across the District, although industrial segment growth was concentrated in regions that experienced gains from commodity production.
Agriculture
Agricultural conditions were soft over the reporting period. Oversupplies of cheese kept demand for milk low. With fewer avian flu outbreaks, chicken exports increased somewhat, but overall demand for chicken remained down. Citrus growers experienced good returns on sales but weak profits because of low yields. Row crops were generally healthy, although severe storms damaged crops in some parts of Mississippi and Alabama. Demand for cotton continued to fall. The cattle market remained strong as demand for beef remained high amid low supply.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.aspx