Beige Book Report: Atlanta
October 18, 2023
Summary of Economic Activity
The Sixth District economy grew at a slow pace from mid-August through September. Labor availability and candidate quality improved, and wage pressures eased further. Some nonlabor input cost increases stabilized, and pricing power was mixed. Retail sales slowed somewhat, but new auto sales were strong. Domestic leisure travel continued to decelerate, but business and international travel strengthened. Home sales were subdued compared to year-earlier levels amid low inventories and rising prices and interest rates. Commercial real estate conditions were mixed. Transportation activity remained slow. Loan growth slowed, and consumer loan delinquencies rose. Energy demand was flat. Agricultural conditions were mixed.
Labor Markets
Most contacts reported that labor markets continued to soften. Labor availability, retention, and the quality of candidates improved by most accounts. However, skilled labor, particularly in construction, remained in short supply in several parts of the District, resulting in project delays. Similarly, agriculture contacts noted that worker shortages prolonged the planting season. Contacts in several Florida markets said that the high cost of living had hurt retention and recruiting efforts. Many firms backfilled open positions while a few said they were hiring for growth. Some contacts in retail, manufacturing, and staffing reduced headcount or hours to align with weaker demand.
Wage growth remained elevated as compared with pre-pandemic levels, but many firms noted that wage pressure continued to ease and further moderation is expected next year. Several contacts had shifted compensation programs to more performance-based models or were promoting other benefits such as hours or location flexibility, development, employee events, and other non-wage incentives.
Prices
Contacts continued to report stabilizing nonlabor input cost increases, though fuel costs, particularly fuel surcharges, rose. Supply chains were described as more predictable; however, delays in the delivery of some construction inputs raised project costs. Food prices were generally cited as easing, though increases in sugar and grain prices persisted. Pricing power was mixed, and many contacts reported continued margin pressure, largely from rising labor and/or insurance costs. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth decreased to 3.1 percent, on average, in September, from 3.3 percent in August; firms' year-ahead inflation expectations for unit cost growth remained unchanged in September at 2.5 percent, on average.
Consumer Spending and Tourism
District retailers reported some slowing in demand as customers cut back on discretionary spending; however, this was described as a normalization from the pandemic's robust pace of growth. Many contacts expect some deceleration in demand growth through the rest of the year and view this decline as meaningful but not overly concerning. Automobile dealers reported healthy sales of new vehicles.
Similar to the previous report, tourism and hospitality contacts reported slowing demand for domestic leisure travel. However, cruise activity and business and international travel were robust. Contacts were cautiously optimistic about the upcoming holiday season, noting challenges in forecasting future demand due to shorter booking windows.
Construction and Real Estate
Home sales were suppressed compared to a year ago due to low supply and declining affordability. House prices continued their sequential gains and have returned to near peak levels in many District markets. With both prices and interest rates on the rise, home ownership affordability deteriorated to record lows. Though homebuilders have increased their market share, contacts expressed growing concerns about the lack of affordability and an inability of some buyers to qualify for financing. Rate buy downs have emerged as the most frequent incentive offered to secure new home sales.
Commercial Real Estate (CRE) contacts reported slowing rent growth, absorption, and sales over the reporting period. Activity in high-end multifamily units slowed and owners acknowledged concessions were needed to finalize leases. Office sector conditions remained mixed as newer buildings saw healthy activity, while occupancy in older buildings declined. More contacts reported growing concerns about the availability of financing, as most lenders strengthened underwriting standards and reduced funding commitments. Some smaller banks, however, continued to actively engage in CRE lending.
Transportation
Transportation activity remained sluggish. While railroads experienced a pickup in domestic intermodal freight, shipments of imports were soft. Some trucking firms reported that flatbed freight volumes remained depressed; others saw slightly stronger export volumes. This year's peak shipping season is expected to be muted as underlying demand remains soft and import activity subdued; container shipping companies have reduced capacity in line with expectations for weaker consumer demand. Warehousing contacts noted that the decline in freight volumes caused a pullback in industrial real estate investments. Florida ports and railroads mentioned minor temporary disruptions from Hurricane Idalia's landfall in Florida's Big Bend in late August.
Manufacturing
Manufacturing activity was mixed. Several firms reported increased production while experiencing a contraction in backlogs, new orders, and finished goods inventories. Auto manufacturers not impacted by the UAW strike noted that strong demand was outstripping production of both luxury and standard models, and some noted robust demand for lower-priced autos. Demand for food products for at-home consumption and quick service restaurants softened, though revenues remained above year-earlier levels due to higher pricing. Some manufacturing contacts reported increasing optimism about activity over the next twelve months.
Banking and Finance
Loan growth slowed across most portfolios. While asset quality was stable, consumers appeared to experience increased financial stress as evidenced by an uptick in consumer loan delinquencies. District financial institutions continued to fund loan growth with large time deposits given heightened competition for core deposits. However, the higher funding cost of time deposits put increased pressure on net interest margins and earnings.
Energy
Demand for utilities and petroleum-refined fuels was described as flat. Rising input and maintenance costs put pressure on margins across energy sectors. Regulated utilities passed through price hikes to customers with further increases anticipated. Private companies actively invested in federal infrastructure-related projects in anticipation of future tax credits and funding distributions. However, many petroleum refiners noted concerns about deteriorating infrastructure necessary to support the transition to renewables, given the lack of investor interest in maintenance or capacity-expanding projects. Investment costs were cited as prohibitive, resulting in project delays. Surplus chemical product supplies from China and Europe lowered demand for U.S. products. Further chemical product demand erosion is a potential risk resulting from a protracted auto manufacturing shutdown.
Agriculture
Agriculture conditions were mixed. Demand for butter increased, but there remained an excess supply of cheese products. In Louisiana and Mississippi, droughts led to the liquidation of herds, resulting in an oversupply of beef. Chicken exports were weak. Soybean and corn yields were strong, creating surpluses. Domestic cotton yields were high, but demand for textiles softened. Hurricane Idalia hit Florida's "timber basket," causing farmers to give away downed trees or pay to have them removed, dampening sales of timber.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.aspx